Economics for Engineers Economic Decision Making Sayantan Sarkar

Economics for Engineers Economic Decision Making -Sayantan Sarkar

Economics & Management Economics is the branch of knowledge concerned with the production, consumption, and transfer of wealth. Management is the study of organizing and allocating a firm’s scarce resources to achieve it’s desired objectives. What is Engineering Economics? Engineering economy is a subset of economy for application to engineering projects.

Why Engineering Economy is Important? Ø Engineers seek solutions to problems, and the economic viability of each potential alternative or design is normally considered along with the technical aspects. Ø Engineering economy involves the evaluation of the costs and benefits of proposed projects. Ø Engineers play a major role in investment by making decisions based on economic analysis and design considerations. Thus, decisions often reflect the engineer’s choice of how to best invest funds by choosing the proper alternative out of a set of alternatives.

Decision Making - Overview Ø Pre-planned course of action taken for a specific time period for meeting some specific objectives. Ø Future course of actions for any economic activity which has a definite outcome in the economy and for the society as well.

Role of Engineering Economy in Decision Making Process Engineers make decisions by using tools and computers that effect what will happen in the future and thus the time frame of engineering economy is the future. Engineering economy analysis presents the best estimates of what is expected to occur.

…Role of Engineering Economy in Decision Making Process Ø Make or buy decisions Ø Purchase of assets or taken on leases Ø Replacement/ maintenance of an asset Ø Depreciation on the basis of historic cost or current market prices Ø Time value of cash flows Ø Effect of inflation on assets and profitability of company Ø Pay back period of a machine or project Ø Cash flow pattern of a project Ø Risk and uncertainty of a project

Steps in Decision Making Process 1. Identify the Problem 2. Analyse the Problem 3. Develop Alternatives 4. Evaluation of Alternatives 5. Select the best Alternatives 6. Implementation 7. Appraisal of results

Problems in Economic Decision Making Process We have unlimited wants and the means to satisfy those wants are limited, with the satisfaction of one want, another arises, and here arises the problem of decision making. The problem of decision making arises whenever a number of alternatives are available, such as: ü What should be the price of the product? ü What should be the size of the plant to be installed? ü How many workers should be employed? Therefore, we can say that the problem of decision making arises due to the scarcity of resources.

Factors effecting Decision making process: Ø Certainty Ø Risk Ø Uncertainty Ø Scarcity of Resources

Aids / Techniques of Economic Decision Making: Probability theory Sensitivity Analysis Decision Tree Replacement Analysis Simulation theory Network Analysis (PERT/CPM)