ECON 211 Notes 09 05 23

ECON 211 ENGINEERING ECONOMICS
INTRODUCTION
Engineering Economy is the most practical subject in the Engineering curriculum, yet it is also one of
most challenging and ever-changing discipline. Thus, Engineering Economics is the analysis, and
evaluation of the factors that will affect the economic success of an engineering projects to the end that a
recommendation can be made which will ensure the best use of capital or simply a collection of
techniques that simplify comparisons of alternatives in an economic basis.
In our personal life for example, we constantly make decisions in our daily lives. Most of these decisions
are done automatically without realizing that we are actually following somewhat a logical flow. Same
logical flow that we follow in decision-making in problems we encounter our workplace or industry. Our
solutions on these industry problems are focused on the following factors
a. promotes the well-being and survival of an organization
b. embodies creative and innovative technology and ideas
c. permit identification and scrutiny of their estimated outcomes
d. translates profitability to the “bottom line” thru valid and acceptable measures of merit
The role of the engineers in our workplace is important and our economic analysis plays a role in many
types of solution. A typical example are as follows:
* Choosing the best design for a high efficiency gas furnace
* Selecting the most suitable robot for the operation of an assembly line
* Making a recommendation about whether a delivery truck for an overnight delivery service
should be purchased or leased
* Determining the optimal staffing plan for a new business
For an engineer to give a sound decision, there seven (7) fundamental principles used in Engineering
Economy
1. Develop the alternatives
The final choice (decision) is among alternatives. The alternatives need to be identified and then
defined for subsequent analysis.
2. Focus on the differences
Consider only the differences in expected future outcomes among the alternatives that are
relevant to their comparison and should be considered in the decision.
3. Use a consistent viewpoint
The prospective outcomes of the alternatives, economic and other, should be consistently
developed from a defined viewpoint (perspective).
4. Use a common 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.
5. Consider all relevant criteria
Selection of a preferred alternative (decision making) requires the use of a criterion (or several
criteria)
6. Make uncertainty explicit
Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and
should be recognized in their analysis and comparison.
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.
The fundamental principles are guides for the procedure in making engineering economy
analysis. Every project is guided by the following basic procedure
1. Problem recognition, definition, and evaluation
2. Define the goal or objectives
3. Define the feasible alternatives
4. Collect all relevant data/information
5. Evaluate each alternative
6. Select the “best” alternative
7. Implement and monitor the decision
Basic Terminology Used
Consumer goods and services are those products or services that are directly used by the people to satisfy
their wants. (e.g., food, clothing, cars, etc.)
Producer goods and services are used to produce consumer goods and services or other producer goods.
(e.g., Machine Tools, airplanes, buses, factory buildings, etc.)
Necessities are those products or services that are required to support human life, needs and activities.
Luxuries are those products or services that are desired by human and will be purchased only after the
required necessities have been satisfied.
Consumption is the satisfaction of human wants and that the value of goods and services that a family
consumes depends on almost entirely on its income and wealth.
Production is the creation of goods and is a major step in the series of economic processes that
brings goods and services to people.
Distribution is the sharing of the output among the resources used in the production or simply the
division of the value of the output (goods) among the factors (or agent) in the production such as land,
labor, capital and management.
Demand is the quantity of a certain commodity that is bought at a certain price at a given place and time.
It is simply the willingness and the ability of the buyer to pay for a product.
Supply is the amount of product made available for sale.
Income is the amount of money that is generated from a variety of sources including salary
(e.g., amount of money paid on a regular basis)
Seller is an entity which makes product, goods and services available to buyer or consumer in exchange
of monetary consideration.
Buyer is the basic consuming or demanding unit of a commodity.
Market is the area or place where buyer and seller agree to exchange a well-defined commodity
Competition is the number of rival firms competing to sell similar goods or services to buyers. Perfect
competition occurs when there are many sellers of a certain goods or services and there are many buyers.
Monopoly refers to a single seller and having many buyers (it is simply the opposite of perfect
competition)
Bilateral monopoly exists when there is one seller and one buyer.
Monopsony is a situation where a product or services is bought and used by one customer.
Oligopoly refers to few suppliers of goods or services and that action by one supplier will inevitably
result in similar action by the others.
Bilateral oligopoly exists when there are few sellers and few buyers
Oligopsony is a situation where a product or services is bought and used by few buyers and that
the action of one buyer can have a significant impact on the price and market in general.

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ECON 211 ENGINEERING ECONOMICS

Basic Terminology Used

Supply is the amount of product made available for sale.

Buyer is the basic consuming or demanding unit of a commodity.

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