Engineering Economy: Principles, Concepts, and Applications

Posted on Sep 1, 2024 in Economy

Engineering Economy: An Overview

Introduction

Engineering activities, encompassing analysis and design, aim to fulfill human needs. This dual nature of engineering involves understanding both the forces of nature and the diverse requirements of people. It’s crucial to evaluate engineering proposals in terms of their worth and cost before implementation.

Definition of Engineering

The Accreditation Board of Engineering and Technology (ABET) defines engineering as: “The profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of humankind.”

The Roles of Scientists and Engineers

Scientists contribute to the existing body of knowledge and uncover universal laws of behavior. Engineers, on the other hand, apply this knowledge to specific situations, creating products and services. Therefore, engineering is not a pure science but rather the practical application of scientific principles.

Engineering Environments

Engineers navigate two interconnected environments:

  1. The Physical Environment: Governed by physical laws and formulas.
  2. The Economic Environment: Concerned with the worth and utility of products and services in economic terms.

The core function of engineering is to manipulate elements of the physical environment to generate value within the economic environment.

The Engineering Process

The engineering process typically involves the following steps:

  1. Determination of Objectives: Identifying what people need that can be provided through engineering solutions.
  2. Identification of Strategic Factors: Recognizing the limiting factors that hinder the achievement of objectives.
  3. Determination of Means: Evaluating various possibilities for overcoming strategic factors to determine the most effective approach in terms of overall economy, leading to engineering proposals.
  4. Evaluation of Engineering Proposals: Selecting the most suitable proposal based on cost-effectiveness.
  5. Assistance in Decision Making: Enhancing the certainty of decisions related to the objective of the engineering application. Correct decisions can mitigate operational challenges and involve choosing the most advantageous course of action.

A Plan for Engineering Economy Studies

Engineering economy studies often follow a structured plan:

  1. The Creative Step: Exploring new ideas, opportunities, and facts through research, investigation, and innovative thinking.
  2. The Definition Step: Defining the alternatives identified in the creative step and ensuring comprehensive consideration of all relevant factors (inputs and outputs).
  3. The Conversion Step: Converting all alternatives to a common measure, typically monetary value, to facilitate comparison.
  4. The Decision Step: Comparing alternatives based on their qualitative and quantitative inputs and outputs, focusing on the differences between them.

Key Concepts in Engineering Economy

Value and Utility

Value represents the worth assigned to an object or service by an individual. It’s subjective and based on personal perception.

Utility refers to the ability of an object or service to satisfy human wants. It’s determined by the individual’s satisfaction derived from it.

Consumer and Producer Goods

Consumer goods directly satisfy human wants, while producer goods indirectly satisfy wants by contributing to the production or construction process.

Economic Aspects of Exchange

Economy of exchange occurs when utilities are exchanged between individuals. Exchanges happen when both parties perceive a mutual benefit. Buyers seek products or services with greater utility than the money spent, while sellers seek monetary gain with greater utility than the product or service sold. Persuasion, both factual and emotional, plays a crucial role in economic exchange.

Classifications of Costs

Understanding different cost classifications is essential in engineering economy:

  1. First Cost: The initial cost of starting an activity.
  2. Operational and Maintenance Costs: Costs associated with running and maintaining a system over its lifespan.
  3. Fixed and Variable Costs: Fixed costs remain constant, while variable costs fluctuate with the level of activity.
  4. Incremental and Marginal Costs: Incremental costs represent an increase in cost, while marginal costs refer to the cost of producing one additional unit.
  5. Sunk Costs: Past costs that cannot be changed by future actions.

Life Cycle Cost

Life cycle cost encompasses all costs, recurring and non-recurring, incurred throughout a system’s or product’s life cycle, which includes the acquisition phase (design and production) and the utilization phase (use and disposal).

Interest and Interest Rate

Interest is the fee charged for the use of borrowed money. Interest rate represents the rate of return on an investment.

Earning Power and Time Value of Money

The earning power of money highlights the potential for profit through investment. The time value of money recognizes that money received in the future is worth less than the same amount today due to factors like inflation and potential investment returns.