ISE 307: Engineering Economics

Engineering Economic Decisions

Topic objectives: Introduce th rational d i i making process. I t d the ti l decision ki identify the engineers role within a firm. introduce the types of strategic engineering economic decisions. yp g g g introduce the fundamental principles in engineering economics.
Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

What is eco o y at s economy?

From the Greek, it means the management of household , g or private affairs and especially expenses. It is the careful management of material resources (dictionary definition).

Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

What is eco o cs at s economics?

Many definitions: y It is the branch of social science that deals with the production and distribution and consumption of goods and services and their management. d i d th i t It is the study of choice and decision-making in a world wt with limited resources. ted esou ces. It is the study of how individuals, businesses and governments use their limited resources to satisfy unlimited wants. li i d It is the study of the production and distribution of wealth.
Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

Words that have economy/economics in them:

Macroeconomics: that area of economics that focuses on analysis of broad trends in a country's economy, such as inflation, unemployment and industrial production. production Microeconomics: The branch of economics concerned with the decisions made by individuals, households, and firms and how these decisions interact to form the prices of goods and services and the factors of production. production Engineering economy/economics: the systematic evaluation of the economic merits of proposed solutions to engineering problems.
Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

What is interest? at s te est

Dictionary definition: it means concern or curiosity. y y In economics, interest has three general definitions. Interest is a surcharge on the repayment of debt (borrowed money). I t Interest is the return derived from an investment. t i th t d i df i t t Interest is the right to claim in a corporation such as that of an owner or creditor.

Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

The Rational Decision-Making Process e at o a ec s o a g ocess

1. 2. 3. 4. 5. 6. Recognize a decision problem g p Define the goals or objectives Collect all the relevant information Identify a set of feasible decision alternatives Select the decision criterion to use Select the best alternative

Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

Notes otes
Decisions made during the engineering design p g g g g phase of a products development determine the majority of the costs of the product manufacturing. The engineering economic decision refers to all investment decisions relating to engineering projects. vest e t dec s o s e at g e g ee g p ojects.

Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

Types of Strategic Engineering Economic Decisions D i i

Service and quality improvement q y p New and product expansion Equipment and process selection Equipment Replacement New Product and Product Expansion Cost Reduction

Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM

ISE 307: Engineering Economics

Fundamental Principles in Engineering Economics E i

Principle 1: riyal now is worth more than riyal at a p y y later time. Principle 2: All that counts is the differences among alternatives. lt ti Principle 3: Marginal revenue must exceed marginal cost. Principle 4: Additional risk is not taken without the expected additional return.

Dr Muhammad Al-Salamah, Industrial Engineering, KFUPM