This document provides an introduction to engineering economics. It discusses the origin and objectives of engineering economics, including key principles such as a nearby dollar being worth more than a distant dollar. It also covers concepts like demand, supply, market equilibrium, and opportunity cost. Additionally, it discusses how engineering economics relates to the engineering design process and decision making. Engineering economics aims to help engineers evaluate alternatives and make optimal economic decisions.

1. Introduction to Economics

2. Origin of Engineering Economy
Objectives and Basis of Engineering Economy
Principles of Engineering Economy
Engineering Economy and Design Process
Engineering Economic Analysis Procedure
Accounting and Engineering Economic Studies.
Introduction to Engineering
Economy

3. I. Arthur Mellen Wellington
December 20, 1847
Born: Waltham, Massachusetts
Son of Oliver Wellington, a physician and his wife
Charlotte Wellington.
1863-1866: Graduated from the Boston Latin
School and began an apprenticeship in civil
engineering in the office of John B. Hande.
Origin of Engineering Economy

4. 1868: Began work in railway engineering with the
Blue Ridge Railroad in South Carolina.
1873-1876: When the depression of 1873
temporarily halted railway building, he turned to
research and published Methods for the
Computation from Diagrams of Preliminary and
Final Estimates of Railway Earthwork.
Origin of Engineering Economy

5. 1876: He expanded some short articles he had
published into “Justification Expenditure for
Improving the Alignment of Railways,” Railroad
Gazett, Sept. 1-Dec. 29, 1876.
1877: Published the first edition of The Economic
Theory of Location of Railways, a 200 page book.
Origin of Engineering Economy

6. III. E. Paul DeGarmo
January 29, 1907: Born: Lucerne, Missouri
Parents: Arthur and Editha DeGarmo
1942: Published with B.M. Woods,” Introduction
to Engineering Economy; Macmillan Company.
1963: Presented an engineering economy course
for the Japan Productivity Center at the request of
the Japanese government.
Origin of Engineering Economy

7. IV. Arthur Lesser, Jr.
May 17, 1909: Born: Newark, New Jersey
Founding Editor of The Engineering Economist.
1954: Held Summer Symposium on Engineering Economy
at the University of Illinois on a break even basis.
Adam Abruzzi, Norman Barish, Gayle McElrath, Gerald
Matchett, Eugene L. Grant, Ernest H. Weinwurm, James J.
Weaver, Joel
B. Dirlan, Robert M. Eastman
Origin of Engineering Economy

8. Engineering Economy
 Engineering is the practical application of
science to the commerce/industry or problem
areas
 Engineering is the discipline dealing with the art
or science of applying scientific knowledge to
practical problems.
 A person applying his mathematical and science
knowledge properly for mankind. A succinct job
description for an engineer consists of two
words: problem solver

9. Engineering Economy
 Economics is the social science that
evaluates how people choose to use the
limited or scarce resources in attempting to
satisfy their unlimited wants.
 Economics is a science which studies human
behaviour as a relationship between ends
and scarce means which have alternative
uses.

10. Engineering Economy
 Engineering economics deals with the methods that
enable one to take economics decision towards
minimizing the cost or maximizing benefits to business
organization.
 Engineering economics deals with the concepts and
techniques of analysis useful in evaluating the worth of
systems, products and services in relation to their costs.
 Engineering economy involves formulating, estimating
and evaluating the economic outcomes when
alternatives to accomplish a defined purpose are
available. Another way to define engineering economy is
as a collection of mathematical techniques that simplify
economic comparison.

11. Engineering Economy
 Engineering Economy, is a
subset of economics concerned
with the use and application of
economic principles in the
analysis of engineering decisions.

12. Special Characteristics of Engineering
Economics
 Closely aligned with conventional micro-
economics.
 Devoted to the problem solving and decision
making at the operations level.
 Useful to identify alternative uses of limited
resources and to select the preferred course of
action.
 Pragmatic in nature. It removes complicated
abstract issues of economic theory.
 Engineering economics integrates economic
theory with engineering practice.

13. Objectives of Engineering Economics
 Understand the problem and define the objective.
 Collect relevant information.
 Define the feasible alternative solutions and make
realistic estimates.
 Identify the criteria for decision making using one or
more attributes.
 Evaluate each alternative, using sensitivity analysis
to enhance the evaluation.
 Select the best alternative.
 Implement the solution and monitor the results.
 Equipment and process selection, Equipment
replacement, New product and product expansion,
Service improvement in reasonable cost.

14. Trade Offs
“There is no such thing as a free lunch!”
Money is a scare resource:
The more burger you buy, the less money you
have in your pocket

15. Trade Offs

16. ECONOMICS

17. WANT VS NEED
 Need:- Something needed to Survive.
 Want:- Something that people desire to have,
that they may, or may not, be able to obtain.

18. Opportunity Cost

19. Opportunity Cost

23. Positive and Normative Analysis:
The Economist as a Scientist and as a Policy
Advisor
 As scientists, economists make
positive statements,
which attempt to describe the world as it is.
 Objective and Fact Based
 As policy advisors, economists make
normative statements,
which attempt to prescribe how the world should
be.
 Subjective and Value Based

24. A C T I V E L E A R N I N G 1
Answers
a. Prices rise when the government increases the
quantity of money.
Positive, describes a relationship, could use data
to confirm or refute.
b. The government should print less money.
Normative, this is a value judgment, cannot be
confirmed or refuted.

25. A C T I V E L E A R N I N G 2:
Answers
c. A tax cut is needed to stimulate the economy.
Normative, another value judgment.
d. Government should provide basic healthcare to
all citizens
Normative, There is no way to prove whether
government "should" provide healthcare; this
statement is based on opinions about the role of
government in individuals' lives, the importance of
healthcare and who should pay for it.

38. Law of Demand & Supply

39. Demand
 Demand comes from the behavior of
buyers.
 The quantity demanded of any good is
the amount of the good that buyers are
willing and able to purchase.
 Law of demand: the claim that the
quantity demanded of a good falls when
the price of the good rises, other things
equal.

40. Supply
 Supply comes from the behavior of
sellers.
 The quantity supplied of any good is
the amount that sellers are willing and
able to sell.
 Law of supply: the claim that the
quantity supplied of a good rises when
the price of the good rises, other things
equal

41. Concept of Supply and Demand

43. Market Equilibrium

44. Concept of Supply and Demand

45. Concept of Supply and Demand

46. Objectives of Engineering Economics
 Understand the problem and define the objective.
 Collect relevant information.
 Define the feasible alternative solutions and make
realistic estimates.
 Identify the criteria for decision making using one or
more attributes.
 Evaluate each alternative, using sensitivity analysis
to enhance the evaluation.
 Select the best alternative.
 Implement the solution and monitor the results.
 Equipment and process selection, Equipment
replacement, New product and product expansion,
Service improvement in reasonable cost.

47. Basis of Engineering Economy
 Principle 1: A nearby dollar is worth more
than a distant dollar
 Principle 2: All it counts is the differences
among alternatives
 Principle 3: Marginal revenue must
exceed marginal cost
 Principle 4: Additional risk is not taken
without the expected additional return

48. 48
Principle 1: A nearby dollar is worth more
than a distant dollar
Today 6-month later

49. 49
Principle 2: All it counts is the differences
among alternatives
Option Monthly
Fuel
Cost
Monthly
Maintena
nce
Cash
outlay at
signing
Monthly
payment
Salvage
Value at
end of
year 3
Buy $960 $550 $6,500 $350 $9,000
Lease $960 $550 $2,400 $550 0
Irrelevant items in decision making

50. 50
Principle 3: Marginal revenue must exceed
marginal cost
Manufacturing cost
Sales revenue
Marginal
revenue
Marginal
cost
1 unit
1 unit

51. 51
Principle 4: Additional risk is not taken
without the expected additional return
Investment Class Potential
Risk
Expected
Return
Savings account
(cash)
Low/None 1.5%
Bond (debt) Moderate 4.8%
Stock (equity) High 11.5%

54. The Principles of Engineering Economics
 Develop the Alternatives
 Focus on the Differences
 Use a Consistent Viewpoint
 Use a Common Unit of Measure
 Consider All Relevant Criteria
 Make Uncertainty Explicit
 Revisit Your Decisions

56. Engineering Design Process

57. The correct solution
to any problem
depends primarily on
a true understanding
of what the problem
really is.
Arthur M. Wellington (1887)

58. Engineering Economy and the Design
Process

59. ACCOUNTING AND ENGINEERING
ECONOMY STUDIES
Accounting satisfy any or all of the following
objectives related to Engineering Economy:
1. Determine the cost of products or services
2. Provide a rational basis for pricing goods or services
3. Provide a means for controlling expenditures
4. Provide information on which operating decisions may
be based and the results evaluated

60. THANK YOU