Engineering Economics
• Engineering economics is the application of economic principles and calculations to
engineering projects.
• Engineering economics deals with the methods that enable one to take economic
decisions towards minimizing costs and/or maximizing benefits to business
organizations.
• It is important to all fields of engineering because no matter how technically sound an
engineering project is, it will fail if it is not economically feasible.
• Engineering economic analysis is often applied to various possible designs for an
engineering project in order to choose the optimum design, thereby taking into account
both technical and economic feasibility.
Engineering Economics
• Economic decision making for engineering systems is called engineering
economy.
• This definition may seem restricted to engineering projects and systems only,
engineering economy however is also the study of industrial economics and the
economic and financial factors which influence industry.
• Engineers and Technologists are the people who are familiar with all the
technicalities of machinery and production therefore they are the best judges of
the useful lives of an asset and they also have the technical knowledge to
calculate the number of units a proposed plant would produce when operational.
Engineering Economics
• In today’s competitive world of business it has become essential that engineers
and technologists should practice financial project analysis for engineering
projects and make rational decisions.
• Engineering economy also includes the study of accounting practices for
manufacturing concerns. Unique features of accounting for manufacturing
concerns are process costing, batch costing, cost allocation.
Engineering Economics
• Engineering economy deals with justification and selection of projects. Many
engineers and technologists work on projects which address a specified activity
or a problem. Any decision regarding the project must be justified.
• In business environments, many if not all, decisions are justified using monetary
(financial) criteria such as “profit”. Such decisions are made at the managerial
level and many engineers and technologists become managers in manufacturing
environment.
• Therefore, all engineers and technologists, regardless of their employment,
should know methods and tools used in evaluation of projects.
Engineering Economics
• The purpose of engineering economy is to expose all engineering students to the
methods which are widely used for evaluation of projects.
• Even though, engineering economy deals mostly with selection of projects in
business environment, the tools and methods can be and are used by individuals
and non-profit organizations such as government, hospitals, and charitable
entities, etc.
SOME EXAMPLES
• Let us present few examples in different environments where engineering economy can
facilitate the decision making process.
• Business Environment: A small manufacturing company needs to buy a forklift truck for material
handling. Two different brands, say A and B, are being considered. Which truck should be
bought? The decision will probably be based on minimization of cost.
• Non-profit Organizations: A project for widening a two lane highway to four lanes is being
considered by the county board. A four lane highway may reduce the traffic accident rate but is
expected to lower property values in the immediate neighborhood of the highway. Should the
proposed highway be built? The county board must weigh the relative benefit of lower accident
rates against the possible loss in value of homes as well as the construction cost.
• Individuals: A new college graduate needs a new car. Should this new car be bought or leased?
Methods from engineering economy can be used for determining the best choice.
Scope of Engineering Economics
• Engineering Economics is a subject of vital importance to Engineers and Technologists.
• This subject helps one understand the need for the knowledge of Economics for being an effective
manager and decision maker.
• It offers wide opportunities in developing countries like Pakistan.
• An engineering aspirant can perform the following roles:
Demand analysis and forecasting
Production and cost analysis
Product policy, sales promotion, and marketing strategy
Profit management
Capital management
Pricing decisions, policies, and practices
