“Introduction to
Engineering Economics”
Prepared by:
ENGR. DHAN NINO SABOCOJAN
Engineering Economics
- also known generally as engineering economics, or
alternatively engineering economy, is a subset of economics,
more specifically, microeconomics.
- It is defined as a "guide for the economic selection among
technically feasible alternatives for the purpose of a rational
allocation of scarce resources."
- Its goal is to guide entities, private or public, that are
confronted with the fundamental problem of economics.
This fundamental problem of economics consists of two
fundamental questions that must be answered, namely what
objectives should be investigated or explored and how
should these be achieved?
Economics as a social science answers those questions
and is defined as the knowledge used for selecting among
technically feasible alternatives for the purpose of a rational
allocation of scarce resources.
As a subdiscipline practiced by civil engineers, engineering
economics narrows the definition of the fundamental economic
problem and related questions to that of problems related to the
investment of capital, public or private in a broad array of
infrastructure projects.
Civil engineers under constant pressure to deliver
infrastructure effectively and efficiently confront complex
problems associated with allocating scarce resources for
ensuring quality, mitigating risk and controlling project delivery.
Civil engineers must be educated to recognize the role played by
engineering economics as part of the evaluations occurring at
each phase in the project lifecycle
Principles of Engineering Economy
Since Engineering Economics involves decision-making, it has
principles that will serve as guide for Engineers.
The foundation of Engineering Economy can be discussed in
terms of seven principles:
1. Develop the Alternatives.
The final choice (decision) is among alternatives. The
alternatives need to be identified and then defined for subsequent
analysis .
Example: The oil company must install antipollution equipment in
a new refinery to meet federal clean-air standards. Four design
alternatives are considered.
2. Focus on the Differences (Compare each alternatives).
Only the differences in expected future outcomes among
the alternatives are relevant to their comparison and should be
considered in the decision.
Example: The outcomes of the Four design alternatives
have different capital investment and annual expenses (i.e.,
power, labor, maintenance, and insurance)
3. Use a Consistent Viewpoint (Have a specific point of
view)
The prospective outcomes of the alternatives, economic
and other, should be consistently developed from a defined
viewpoint (perspective).
Example: The viewpoint of the oil company (the owner of
the refinery who will pay the cost) should be considered in
generating the alternatives
4. Use a Common or Universal Unit of Measure.
Using a common unit of measurement to enumerate as many of the
prospective outcomes as possible will make easier the analysis and
comparison of alternatives.
Examples of Non-monetary (not economic) Outcomes:
[Link] to employees and to the public.
[Link] or exceeding all environmental requirements.
[Link] good public relations.
Example: The outcomes of the four designs are measured in US Dollars.
For instance, capital investment for design A costs 1,000,000 USD
5. Consider All Relevant Criteria.
Selection of a preferred alternative (decision making)
requires the use of a criterion (or several criteria). The decision
process should consider the outcomes enumerated in the
monetary unit and those expressed in some other unit of
measurement or made explicit in a descriptive manner.
Example:
In order to be economically acceptable, the selection
criterion is “Cost”. In addition, government satisfaction (not
economics) is another important criterion.
6. Consider the risks and uncertainties.
Uncertainty is inherent in projecting (or estimating) the
future outcomes of the alternatives and should be recognized in
their analysis and comparison.
The probability is high that today’s estimates of, for
example, future expenses will not be what eventually occurs.
7. Revisit Your Decisions
Improved decision-making results from an adaptive process; to
the extent practicable, the initial projected outcomes of the
selected alternative should be subsequently compared with
actual results achieved.
To summarize the diagram :
1. Problem recognition, formulation, and evaluation.
2. Development of the feasible alternatives.
3. Development of the cash flows for each alternative.
4. Selection of a criterion (or criteria).
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post-evaluation results.
Cost Concepts and Design Economics
Costs can be categorized in several different ways.
Fixed cost - unaffected by changes in activity level (Insurance,
taxes, and any license fees)
Variable cost - vary in total with the quantity of output (Direct
labor, Materials used in the product)
Incremental cost - additional cost resulting from increasing
output of a system by one (or more) units (Car driving cost)
Direct Cost - can be measured and allocated to a
specific work activity (Materials, Labor) & can be found in
the project’s Program of Works
Indirect Cost - difficult to attribute or allocate to a
specific output or work activity (overhead, maintenance)
and can be found in the project’s Program of Works
Standard cost - cost per unit of output, and plays an
important role in cost control and other management
functions.
Cash cost - a cost that involves a payment of cash.
Book cost - a cost that does not involve a cash
transaction but is reflected in the accounting system.
(equipment, machines, Depreciation)
Sunk cost - a cost that has occurred in the past and
has no relevance to estimates of future costs and
revenues related to an alternative course of action.
- Example: money spend on a passport
KEY POINTS:
Engineering Economics is a guide for the economic selection among
technically feasible alternatives for the purpose of
_______________1________________.
As a subdiscipline practiced by civil engineers, engineering economics
_________________________2____________________________________________________
_________________ to that of problems related to the investment of capital,
public or private in a broad array of infrastructure projects.
Engineering Economics has seven (7) key principles. They are:
________3____, _____________4________________,
_____________5____________________, __________________6_____________,
_____________________7___________________________, _______8__________,
____________9_______________, ____________10_________.
Engineering Economics design process is summarized into seven (7)
steps. They are: ________11___________, _________________12________________,
____________________13_____________________, _______________14______________,
___________________15__________________, _____________16____________________,
________17_________, and _________18_________.
KEY POINTS:
Engineering Economics is a guide for the economic selection among
technically feasible alternatives for the purpose of a rational allocation of
scarce resources.
As a subdiscipline practiced by civil engineers, engineering economics
narrows the definition of the fundamental economic problem and
related questions to that of problems related to the investment of capital,
public or private in a broad array of infrastructure projects.
Engineering Economics has seven (7) key principles. They are: Develop
the Alternatives, Focus on the Differences (Compare each alternatives),
Use a Consistent Viewpoint (Have a specific point of view), Use a
Common or Universal Unit of Measure, Consider All Relevant Criteria,
Consider the risks and uncertainties, and Revisit Your Decisions.
Engineering Economics design process is summarized into seven (7) steps.
They are: Problem recognition, formulation, and evaluation;
Development of the feasible alternatives; Development of the cash
flows for each alternative, Selection of a criterion (or criteria), Analysis
and comparison of the alternatives, Selection of the preferred
alternative, Performance monitoring, and post-evaluation results.