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Engineering-Economics - Lecture 1

This document outlines the key topics to be covered in a lecture on engineering economics. It includes: 1. An introduction covering principles of engineering economics, the decision analysis process, cost concepts for decision making, and key terminologies. 2. Sample problems demonstrating engineering economic analyses for designing a car and building a house. 3. Details on fundamental aspects of decision problems, factors contributing to complex decisions, and definitions of decision analysis and a complete economic analysis. 4. Explanations of important cost concepts, laws of demand and supply, and other economic terminologies. The document provides an overview of the concepts and methods to be taught in the engineering economics lecture through outlines, examples, definitions and

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25 views

Engineering-Economics - Lecture 1

This document outlines the key topics to be covered in a lecture on engineering economics. It includes: 1. An introduction covering principles of engineering economics, the decision analysis process, cost concepts for decision making, and key terminologies. 2. Sample problems demonstrating engineering economic analyses for designing a car and building a house. 3. Details on fundamental aspects of decision problems, factors contributing to complex decisions, and definitions of decision analysis and a complete economic analysis. 4. Explanations of important cost concepts, laws of demand and supply, and other economic terminologies. The document provides an overview of the concepts and methods to be taught in the engineering economics lecture through outlines, examples, definitions and

Uploaded by

Lledniw Games
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© © All Rights Reserved
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Download as PDF, TXT or read online on Scribd
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Outline:

Lecture I:
• Principles of Engineering Economics
• Decision Analysis Process
• Cost Concepts for Decision Making
• Terminologies

Outline
Engineering Economics

“It is the analysis and evaluation of the


factors that will affect the economic
issues of success of a project to the
end that a recommendation can be
made which will insure the best
capital.” - H. Sta. Maria

Engineering Economics - Introduction


Sample Analysis:
As a Mechanical Engineer, you are in-charge to design a car.

2X

3X

5X
DMC DeLorean 1983
Engineering Economics - Introduction
Sample Analysis:
As an Engineer, you are in-charge to design and build a house.

Construction Cost: P 500,000.00


Budget of the client: P 230,000.00

Engineering Economics - Introduction


Engineering Economics

1. Know the problem and produce alternatives.


2. Compare each alternatives.
3. Have a specific point of view.
4. Use a universal unit of measure.
5. Don't forget the other criteria.
6. Consider the risks and uncertainties.
7. Review your decisions.

Engineering Economics - Principles


Know the problem and produce alternatives.

Goal: To build a two-storey residential House.


Problem: Lack of budget.

Engineering Economics - Principles


Compare each alternatives.

Construction Cost: Construction Cost:


P130,000.00 P 280,000.00
Maintenance Cost: Maintenance Cost:
P 15,000/year P 0.00

Plan B Plan C
Engineering Economics - Principles
Have a specific point of view.

Client Management

Engineering Economics - Principles


Use a universal unit of measure.

Engineering Economics - Principles


Don't forget the other criteria.

Engineering Economics - Principles


Consider the risks and uncertainties.

Engineering Economics - Principles


Review your decisions.

Engineering Economics - Principles


Sample Problems 1:
Alex needs 20 liters of gasoline for his car. The good thing is there is a
gasoline station near his house but the gasoline costs 67.00 Php per
liters. There is another gasoline station on a nearby town that sells
their gas 45 Php per liters. However, he has to drive for 16 km to reach
the other gasoline station. His car consumes 1 liter of gasoline per
kilometer. Which alternative is cheaper? What other factors do you
think should be considered?

Engineering Economics – Sample Problem


Sample Problem 2:
To save money, your mother decided to switch the from using to LPG
(costs 1050.00 Php per 11kg) to using charcoal instead (only 70 Php per
pack). The LPG lasts for 3 months while a sack of charcoal lasts for a
week. Did you mother make the right choice? What other factors
should be considered? What other alternatives could you offer?

Engineering Economics – Sample Problem


Sample Problem 3:
Your friend, Gates, decided to buy a house for 100,000 Php. He spent
10,000 Php on his bank account and loaned the rest from the bank.
The bank requires him to pay 55,000.00 Php per year for the loan. The
house also requires an annual maintenance that costs 10,500 Php. To
gain money, he rented the four rooms in his house to other people
costing 1,200 Php each. Will his investment return? If not, what could
you advice him?

Engineering Economics – Seatwork 1


Fundamental Aspects of Decision Problems

1. A perceived need to accomplish some objectives.


2. Several alternatives, one of which must be selected.
3. The consequences associated with alternatives are different.
4. Uncertainty usually about the consequences of each alternative.
5. The possible consequences are not all equally valued.

Engineering Economics – Economic Decision


Today’s Decision Problems are Complex

• High Stakes
• Complicated Structure
• No overall experts
• Need to justify decisions

Engineering Economics – Economic Decision


Factors Contributing to Complexity of Decision
Problems
1. Multiple objectives 7. Risks to Life and Limb
2. Difficulty of identifying good 8. Inter-disciplinary Substance
alternatives. 9. Several Decision Makers
3. Intangibles 10. Value tradeoffs
4. Longtime Horizons 11. Risk Attitude
5. Many Impacted groups 12. Sequential Nature of Decisions
6. Risk and Uncertainty

Engineering Economics – Economic Decision


What is Decision analysis?
"a philosophy, articulated by a set of logical axioms, and a
methodology and collection of systematic procedures, based upon
those axioms, for responsibly analyzing complexities inherent in
decision problems."

“a formalization of common sense for decision problems which are


too complex for informal use of common sense.”

Engineering Economics – Economic Decision


Decision Analysis Process (Keeney)

Engineering Economics – Economic Decision


Decision Analysis Process (Clemen and Reilly)
1. Identify the decision situation
2. Understand the objectives
3. Identify the alternatives
4. Decompose and model the problem
a. Problem structure
b. Uncertainty
c. Preferences
5. Choose the best alternative
6. Sensitivity analysis
7. Iterate: Is further analysis needed?
8. Implement the chosen alternative
Engineering Economics – Economic Decision
What is a complete economic analysis?
A complete economic analysis is one that covers “each year of the life
of an investment, taking into account relevant direct costs, indirect and
overhead costs, taxes, and returns on investment, plus any
externalities, such as environmental impacts, that are relevant to the
decision to be made.” (NREL 1999)

The financial analysis focuses on the monetary flows of incomes and


expenditures and their timing, while the economic analysis is based on
the willingness to pay and the willingness to accept compensation
rather than prices actually paid.

Engineering Economics – Economic Analysis


Engineering Economics – Economic Analysis
Cost Concept for Decision Making

Fixed and By-Product Allocated Discretionary Step Costs


Variable Costs Costs Costs Costs

Engineering Economics – Cost Concept


Terminologies
Consumer Goods vs Producer Goods
Necessities vs Luxuries
Demand vs Supply

Engineering Economics – Terminologies


Types of Demand
• Elastic
• Inelastic
• Unitary

Engineering Economics – Terminologies


Types of Demand Types of Competition
• Elastic • Perfect
• Inelastic • Monopoly
• Unitary • Oligopoly

Engineering Economics – Terminologies


Law of Demand & Supply

Engineering Economics – Terminologies


Law of Diminishing Return

Engineering Economics – Terminologies


Activity No.1 - "PechaKucha"
Part 1. Application of Engineering Economics Principle:
• Group 1 – Sample No. 2
• Group 2 – Sample No. 3

Part 2. Application of Decision Analysis on work of Tani in 1983 on the


Synthetic Fuels Commercialization Program.
• Group 3 - Identify the different factors that make the adoption of synthetic
fuel in the US a complex problem.
• Group 4 - Identify the steps of decision analysis as outlined by Keeney.
• Group 5 - Identify the steps of decision analysis as outlined by Clemen and
Riley.
Engineering Economics
Thank you for attending the class!

Engineering Economics

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