What is Engineering Economics?

Engineering economics (engineering economy) is a sub-field of economics to study the use and application of the economic principles in the engineering analysis of decisions along with the systematic evaluation of the advantages of project costs inclusive of engineering design and analysis. It emphasizes microeconomics (a subset of economics) for researching the behavior of people in the decision-making process of assigning and determining multiple alternatives to the usage of some of the restrained resources and merging economic theory and engineering practice in a practical manner. It depicts the logical framework of economics in addition to the analytical application of statistics and mathematics.

Eugene Grant is the father of the engineering economy and he published a textbook called the principles of engineering economy, New York in 1930 with the assistance of The Ronald Press Company.

A competent and successful engineer should have an advanced understanding of the principles of economics. Engineering economic system needs the application of engineering design and principal analysis to give services and outcomes that content the consumer at a decent cost and it quantifies the benefits of finance by associating with engineering projects to save capital investments. Engineers obtain solutions to engineering problems by combining technical aspects and economic operations. Engineering economics includes evaluation, the study of investment calculations, and formulation theory to achieve the target.

In certain U.S. undergraduate civil engineering courses, engineering economics is a mandatory course under the topic ‘Fundamentals of Engineering examination’ with questions related to principles and engineering practices. The time and value for money are one of the major factors in engineering economics, for the analysis interval, cost, and revenues are taken into account and sometimes the salvage value is the revenue for decommissioning the project. Certain other fields associated with engineering economics are depreciation, taxes, accounting, and capital finance.

Central topics in engineering industrial economics include:

• The management, operation, profitability, and growth economics of engineering firms.
• Macroeconomics trends.
• Engineering market supply and demand.
• Benefit-cost ratio.

Engineering Economics examples

Certain examples of engineering economic problems involve value analysis and economic studies. Engineering economics assists in the provision of Gantt charts and network diagrams for the appropriate usage of time and resources.

Applications of engineering economics comprise of:

• Value analysis: Effective value analysis is typically for industrial engineers and managers to clarify and improve processes as well as the logical designs for easier understanding of those products and systems. It is not directly related to the engineering economy but holds significance by permitting engineers to manage new and existing procedures efficiently.
• Linear programming: It is the application of mathematical methods to determine optimized solutions, whether they be minimized or maximized in nature.
• Capital budgeting: It is correlated to the engineering economy and is the correct usage and utilization of capital or revenue to obtain the objectives of engineering projects.
• Depreciation and valuation: Depreciation is the reduction in the value of a particular asset. Valuation is the procedure to find the present or original value of the asset. The major depreciation form was used inside the U.S. known as the Modified Accelerated Capital Recovery System (MACRS).
• Minimum cost: It holds a lot of significance in the internal handlings of the engineering economy branch for limiting or cost-cutting of resources like time, labor, materials, and so on for an increase in profit.

$C=ax+\frac{b}{x}+k$

where C is the total cost, a b and k are constants, and x is the variable number of units generated.

Other notable uses of engineering economics are critical path economy, interest, and time-money relationships, risk and sensitivity analysis, incremental and sunk costs, replacement, and a variety of other economic studies in both private and public ventures.

The 7-steps procedure used for the decision making

1. The recognition, evaluation, and definition of the problem.
2. Search for potential as well as possible alternatives.
3. Implementing the basic cash flow approach.
4. Decisions must serve the long-term interest of the venture.
5. Analyzing the economic aspects of the engineering issue.
6. The preferred change is based on the total effort.
7. Attention to ensure customer reviews and feedback for enhancement of operation.

The major steps to be applied to almost every type of situation

• Planning and screening for reviewing objectives and issues that can be confronted.
• Reference to standard economic studies and consultation of standard forms.
• Estimation and speculation of the magnitude of costs and other variables.
• Reliability of proper calculation.
• Difference between actual and projected performance with the means of verifying savings, reviewing failures, ensuring that proposals are valid, and adding to future studies.
• The objectivity of the analyst for making sure that the individual performing advanced proposals or conducted analysis was not biased toward some outcomes.

Context and Applications

• Bachelors in Civil Engineering
• Masters in Construction Project Management
• Masters in Construction Economics and Management
• Masters in Engineering Economics

Practice Problems

1. What is the full form of MACRS?

1. Modified Accelerated Capital Recovery System
2. Modified Accomplished Capital Recovery System
3. Modified Accelerated Costing Recovery System
4. Modified Accelerated Capital Revenue System

Correct option- a

Explanation: The full form of MACRS is Modified Accelerated Capital Recovery System

2. Which of the following statements is incorrect?

1. Engineers obtain solutions to engineering problems by combining technical aspects and economic operations.
2. The time and value for money are one of the major factors in engineering economics, for the analysis interval, coat and revenues are taken into account and sometimes the salvage value is the revenue for decommissioning the project.
3. Engineering economics assists in the provision of Gantt charts and network diagrams for the appropriate usage of time and resources.
4. Depreciation is the increase in the value of a particular asset.

Correct option- d

Explanation: Depreciation is the reduction in the value of a particular asset.

3. Who is known as the father of Engineering Economics?

1. Elise Grant
2. Eugene Grant
3. Eugene Grace
4. Erin Yeager

Correct option- b

Explanation: The father of Engineering Economics is known as Eugene Grant.

4. In certain U.S. undergraduate civil engineering courses, engineering economics is a mandatory course under which topic?

1. Fundamentals of Energy examination
2. Fundamentals of Economics examination
3. Fundamentals of Engineering examination
4. Fundamentals of Elements examination

Correct option- c

Explanation: In certain U.S. undergraduate civil engineering courses, engineering economics is a mandatory course under the Fundamentals of Engineering examination topic.

5. Which of the following is a part of the 7-steps procedure used for decision-making?

1. Implementing the basic cash flow approach.
2. The objectivity of the analyst for making sure that the individual performing advanced proposals or conducted analysis was not biased toward some outcomes.
3. Difference between actual and projected performance with the means of verifying savings, reviewing failures, ensuring that proposals are valid, and adding to future studies.
4. None of these

Correct option- a

Explanation: Implementing the basic cash flow approach is a part of the 7-steps procedure used for decision-making.

Related Concepts

• The Ronald press company.
• Page 1 risk and sensitivity analysis
• Principles of economic systems