ENGINEERING

ECONOMICS
Chapter No.1
Introduction to Engineering Economy
What is Engineering??
Engineering
Engineering is the discipline, profession
and technology of applying scientific
practical knowledge, in order to design and
build structures, machines, devices,
systems, materials and processes.
Hence,
Engineering is the practical application of
science and math to solve problems, and it
is everywhere in the world around you.

Engineering technologies improve the

ways that we communicate, work, travel,
stay healthy, and entertain ourselves.
What is Economics??
Economics
Especially relevant study to financial
considerations…

Economics is the social science that analyzes

the production, distribution, and consumption of
goods and services.
It studies how individuals, businesses, and
governments make choices to allocate scarce
resources efficiently.
 Economics
1.Production – The process of creating goods and
services using resources like labor, capital, and raw
materials.
1. Example: A factory producing smartphones
using workers, machinery, and raw materials.
2.Distribution – The way goods and services are
delivered to consumers, including supply chains,
transportation, and market structures.
1. Example: A supermarket distributes food
products to customers through stores or online
services.
3.Consumption – The use of goods and services by
individuals or businesses to satisfy needs and wants.
1. Example: A family buying groceries for daily
meals or a company purchasing software for
business operations.
Economics explains how people
interact within markets to get
what they want or accomplish
certain goals.
Since economics is a driving
force of human interaction,
studying it often reveals why
people and governments behave
in particular ways.
Branches of Economics
1.Microeconomics – Studies individual and
business decisions about resource
allocation.
1.Example: How a company sets the price of a
new product based on demand and
production costs.
2.Macroeconomics – Examines the
economy as a whole, including inflation,
GDP, and unemployment.
1.Example: A government's policy to reduce
unemployment by increasing public spending.
 Inflation

Definition:
Inflation is the rate at which the general level of
prices for goods and services rises over time,
reducing the purchasing power of money.

Example:
•If a loaf of bread cost $1 last year and now costs
$1.20, that means there is inflation because
prices have increased.
•If inflation is too high, people can buy fewer
things with the same amount of money.
Causes of Inflation:

•Demand-Pull Inflation: Too much demand for

goods and services, but not enough supply.

•Cost-Push Inflation: When the cost of

production (wages, raw materials) increases,
leading to higher prices.

•Money Supply Increase: When more money

is in circulation, it can reduce its value and
cause prices to rise.
Effects of Inflation:

•Negative: Prices rise, making daily life

more expensive; savings lose value.

•Positive: Controlled inflation can

encourage spending and investment,
boosting economic growth.
Gross Domestic Product (GDP)
Definition:
GDP (Gross Domestic Product) is the total
value of all goods and services produced
within a country in a specific period
(usually a year). It measures a country’s
economic health and performance.
Example:
•If a country produces cars, clothes, food,
and services like banking and healthcare,
their total value is added up to get GDP.
•If GDP is growing, the economy is
expanding; if it is shrinking, the economy
is struggling.
Ever wonder why food costs rise
when gas prices spike?
Ever wonder why you can’t get a
good interest rate on your
savings account?
Most simply, economics is the
study of making choices.…
So what is Engineering
Economics?
Engineering Economics
Engineering economics is the application
of economic
techniques to the evaluation of design and
engineering alternatives.
The role of engineering economics is to
assess
the appropriateness of a given project,
estimate its value, and justify it from an
engineering standpoint.
 Why we study
Engineering Economics
It is used to answer many
different questions

Which engineering projects are

worthwhile?
Which engineering projects should
have a higher priority?
How should the engineering project
be designed?
Classification of Problems
•Simple Problems
•Intermediate Problems
•Complex Problems
Engineering economic analysis is used ,when
problems meet these three criteria

The problem is important enough to

justify or giving it serious thought and
effort.
A careful analysis requires that we
organize the problem and all the
various consequences, and this is just
too much to be done all at once.
The problem has economic aspects
important in reaching a decision.
9 Elements of the Decision
Making
1. Recognize the problem.
2. Define the goal or objective
3. Assemble relevant data
4. Identify feasible alternatives
5. Select the criterion for choosing the best
alternative
6. Choose a model
7. Predict the outcomes for each
alternative.
8. Choose the best alternative.
9. Audit the results.
Flow Chart of the Decision
Making Process
Principles of Engineering
Economy
PRINCIPLES OF ENGINEERING
ECONOMY
1. Develop the Alternatives;
2. Focus on the Differences;
3. Use a Consistent Viewpoint;
4. Use a Common Unit of Measure;
5. Consider All Relevant Criteria;
6. Make Uncertainty Explicit;
7. Revisit Your Decisions
1.DEVELOP THE ALTERNATIVES

The final choice (decision)

is among alternatives.
The alternatives need to
be identified and then
defined for subsequent
analysis.

Example: If a company wants to

build a bridge, it should consider
different designs, materials, and
construction methods before selecting
the most cost-effective one.
 2. FOCUS ON THE DIFFERENCES
Only the differences in expected
future outcomes among the
alternatives are relevant to their
comparison and should be
considered in the decision. When
comparing alternatives, consider
the differences in cost,
benefits,If and
Example: risks thathave
two machines matter.
the
same energy consumption but differ in
maintenance costs, only maintenance
cost differences should be considered.
3. USE A CONSISTENT
VIEWPOINT
The prospective outcomes of the
alternatives, economic and other,
should be consistently developed
from a defined viewpoint
(perspective), such as company
objectives, environmental impact,
or long-term
Example: When benefits.
comparing two
manufacturing plants, ensure that
both are evaluated using the same
timeframe, inflation rate, and
depreciation method.
4. USE A COMMON UNIT OF
MEASURE
Using a common unit of
measurement (usually money)
to enumerate as many of the
prospective outcomes as
possible will make easier the
analysis and comparison of
alternatives.
4. USE A COMMON UNIT OF
MEASURE
Example: If evaluating two
power plants—one using coal
and the other solar—convert
environmental impact,
operational costs, and efficiency
into monetary values for
direct comparison.
5. CONSIDER ALL RELEVANT
CRITERIA
 Selection of a preferred
alternative (decision making)
requires the use of a criterion
(such as performance, safety,
environmental impact, and
social factors). 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
5. CONSIDER ALL RELEVANT
CRITERIA
Example: A company choosing
between two suppliers should not
just look at price but also
quality, delivery time, and
reliability.
6. MAKE UNCERTAINTY EXPLICIT
Engineering decisions always involve
some uncertainty (e.g., future costs,
demand changes, technological
advancements). Use probability,
risk assessment, and sensitivity
analysis to account for uncertainties.
Example: A company investing in
electric vehicles should consider
potential battery cost
reductions and government
incentives in the future.
7. REVISIT YOUR
DECISIONS
Periodicallyreview past
decisions to adapt to new
information, market changes,
and technological
advancements.
Example: A city that installed LED
streetlights should review energy
savings and maintenance costs
every few years to ensure the
investment remains beneficial.
Applying these principles helps
engineers and decision-makers
choose the best economic
option while considering cost,
efficiency, and long-term
sustainability.
Applying these principles helps
engineers and decision-makers
choose the best economic
option while considering cost,
efficiency, and long-term
sustainability.
1-1. Stan Moneymaker needs 15 gallons of
gasoline to top off his automobile’s gas
tank. If
he drives an extra eight miles (round trip)
to a gas station on the outskirts of town,
Stan can save $0.10 per gallon on the
price of gasoline. Suppose gasoline costs
$3.90 per gallon and Stan’s car gets 25
mpg for in-town driving. Should Stan
make the trip to get less expensive
gasoline? Each mile that Stan drives
creates
one pound of carbon dioxide. Each pound
of CO2 has a cost impact of $0.02 on the
environment. What other factors (cost and
Should Stan Moneymaker Drive to
the Outskirts for Cheaper Gas?

To determine if Stan should drive the

extra 8 miles to save money on
gasoline, we need to calculate:

1.Savings on Gasoline
2.Cost of Extra Driving (fuel +
environmental impact)
Step 1: Savings on Gasoline

•Gasoline needed: 15 gallons

•Price difference: $0.10 per

gallon

•Total savings: 15×0.10=1.50

•Stan saves $1.50 if he buys gas

at the cheaper station.
Other Factors to Consider
1.Time Cost – Driving 8 extra miles
wastes time, which may not be worth
$0.09.
2.Wear and Tear on Car – More
miles increase maintenance costs
(tires, oil, depreciation).
3.Convenience – Is it worth the
effort for such a small saving?
4.Traffic and Safety – Extra driving
means more exposure to accidents
and congestion.
Conclusion: Not Worth It! 🚫

Since Stan only saves $0.09,

the trip is not financially
justifiable considering fuel,
environmental impact, and other
costs. He should buy gas at
the closer station.