Name: Shriraam Madanagopal

TERM PAPER

Engineering Economy –IE 5304

Topic: An introduction to Engineering Economy

Engineering Economy –IE-5304

Introduction:

The world is rapidly shrinking. The revolution in communications, travel, transportation, the movement toward single unified market, as well as the huge flow of foreign capital and direct investments throughout the world are leading towards a global economy. In today’s global economy, Engineer-Managers certainly play a vital role and there is a huge demand for them all over the world. Engineers need to have an international dimension into economics to reflect the globalization of production and distribution in today’s competitive world.

Defining Economics:

Economics is the study of how people choose to use scarce or limited productive resources such as land, labor, and capital goods such as machinery, technical knowledge to produce various commodities and distribute them to various members of society for their consumption. This further leads to various aspects like human choice, human behavior, allocation of scarce resources and alternative use of resources. Human behavior relate to the behavior of people. Allocation of scarce resources arises because of limited supply compared to demand. The scarcity of resources calls for the optimal allocation of resources available.

Microeconomics VS Macroeconomics:

Microeconomics deals with the theory of the firm, and the behavior and problems of individuals and of micro-organizations.

The elements of microeconomics include Demand Concepts, Price Theory and Theories of Markets.

Micro Economics Provide Solutions for various Questions like :

What goods should be produced and in what quantity? How the goods are produced? How the goods should be distributed? How efficiently the resources are used?

Macroeconomics is concerned about the behavior of the economy as a whole and theories about its operations.

The elements of Macroeconomics deal with determination of national income, employment and prices, the analysis of aggregate consumptions and balance of payments, and the study of money, banking and financial institutions.

Managerial Economics:

Managerial Economics refers to the application of economic theory and the tools of analysis of decision science to examine how an organization can achieve its goal or objective functions as efficiently as possible.

Engineering Economics:

Engineering Economics deal with systematic evaluation of costs and benefits of proposed technical and business project ventures. It deals with the concepts and techniques of analysis useful in evaluating the worth of the systems, products and services in relation to their cost. This also does the systematic analysis of the benefits and costs of different project in order to select the best alternative using the quantitative techniques.

Engineering Economics encompasses various fields like Mathematical Economics and Econometrics.

Mathematical economics is used to formalize that is to express in equation form- the economic models postulated by economic theories.

Econometrics refers to the empirical estimation and the testing of economic relationships and models. It applies statistical tools to real world data to estimate the models postulated by economic theory and for forecasting.

On the whole Engineering Economics follow a certain set of principles, concepts, techniques and methods by which alternatives within a project can be compared and evaluated for the best monetary return.(Monetary investments are the value of the worth of the investment.)

Economic consideration as a primary concern and sound techniques to support it started to be developed in the 19th century.

1887: Arthur M.Wellington (a civil engineer) addressed the of economic analysis in railroad building in the United States.

1930: Eugene L. Grant wrote the first text book “ Principles of Engineering Economy”

Decision Making:

Decision making is the process of sufficiently reducing uncertainty and doubt about alternatives to allow a reasonable choice to be made from among them. The above mentioned way of defining decision making stresses the information gathering function of decision making. It should be noted here that uncertainty is reduced rather than eliminated. Very few decisions are made with absolute certainty because complete knowledge about all the alternatives is seldom possible. Thus, every decision involves a certain amount of risk.

Everyone has to make decisions. Very often it involves alternatives, with monetary consequences corresponding to each alternative. The main objective of decision making is to maximize the economic outcome and produce favorable results.

Decision Quality:

This is a rating of whether a decision is good or bad. A good decision is a logical one based on the available information and reflecting the preferences of the decision maker.

The important concept to grasp here is that the quality of a decision is not related to its outcome: a good decision can have either a good or a bad outcome. Similarly, a bad decision (one not based on adequate information or not reflecting the decision maker's preferences) can still have a good outcome.

An example to this decision Quality will help us understand the actual importance of Decision Quality.

For example, if you do extensive analysis and carefully decide on a certain investment based on what you know about its risks and your preferences, then your decision is a good one, even though you may lose money on the investment. Similarly, if you throw a dart at a listing of stocks and buy the one the dart hits, your decision is a bad one, even though the stock may go up in value.

Decision Making Procedure:

Decision making procedure involves following steps:

Identify the decision to be made together with the goals it should achieve

Gather the facts

Develop Alternatives

Analyze the Alternatives

Risk Analysis of each Alternative

Make a Decision based on the above analyzed steps.

Types of Decision Making:

Personal Decision

Engineering Activities

Public sector Projects

A Review on Decision Making Types:

Engineering activities & public sector projects often involves planning of (large sum) capital expenditure which tends to large scale decision.

For companies, it will impact the financial statements the companies’ worth = shares price.

For public sector projects, it’s usually not about the earnings of the projects, but also involves quantifying the benefit of the projects to public welfares.

Therefore we need more Structured Approach

References:

Engineering Management –V.Jayakumar

Park, Chan S., Fundamentals of Engineering Economics, Prentice Hall, 2004.

Blank, Leland T. and Tarquin, AnthonyJ., Engineering Economy, 6th ed., Mc-

Graw Hill, 2005.

Sullivan, William G., Wicks, Elin M.,and Luxhoj, James T., Engineering Economy, 12th ed., Prentice Hall, 2003.