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Engineering Economy

Engineering Economy. Lecture One. Economic Decisions. Decision making is an all encompassing topic. How many decisions have you made already today? Should I get out of bed this morning? Should I shower, brush my teeth, comb my hair, etc.?. Economic Decisions.

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Engineering Economy

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  1. Engineering Economy Lecture One

  2. Economic Decisions • Decision making is an all encompassing topic. • How many decisions have you made already today? • Should I get out of bed this morning? • Should I shower, brush my teeth, comb my hair, etc.?

  3. Economic Decisions • Complex problems – a mixture of economic, political, and humanistic • When do we use engineering economic analysis?

  4. A different kind of cost, from the perspective of how much it takes to produce 1 item • Average Unit Cost – cost on a per unit basis • Variable cost per unit of volume is constant • As volume increases, fixed cost per unit decreases • While semi-variable cost changes slightly

  5. Economic Decisions • You get the picture. These are mini-problems (or events that call for decisions) that we are solving every minute of every day.  • These are what one would call “simple problems”, that an individual can solve.  • Intermediate problems usually call for decisions that are economic in nature.

  6. Economic Decisions The problem: 1)      Is it sufficiently important. 2)      Does it require organized thought. 3) Does it have an economic component.

  7. What is the engineer’s role in economic decisions? • Capital expenditures – equipment purchases • Design of new products

  8. Types of Business Organization Proprietorship – a business owned by an individual Partnership – more than one owner Corporation – a legal entity created by a state, lots of owners from stock (Government – the ultimate corporation)

  9. Business Types • There are advantages of each type of business and engineers are involved in all three types of busines structures

  10. Types of Economic Decisions

  11. Long term Economic Decisions 1)      Equipment and process selection 2)      Equipment replacement 3)      New product and product expansion 4)      Cost Reduction 5)      Service Improvements

  12. Made on the basis of the Cost-Volume Relationship (Price vs Quantity in Micro.) Volume index – unit measure of volume (based on inputs or outputs) Input – person/hours Output – hamburgers/day that are made Volume of activity, quantity of product produced, is related to the cost of producing the product (or the price charged). Short term Economic Decisions

  13. Costs can be of three types: • Fixed Costs – cost of doing business, basic operating cost • Variable Costs – cost related to the volume of business performed The materials put into the product, increases with the amount of product produced • Semi-Variable Costs – characteristics of both (i.e. car value depreciation)

  14. For example:A few of the costs for running a restaurant Fixed costs Lease ($2000/month) Dishes ($300/month) Variable Costs Amount of food ($1/person) Paper products ($0.25/person) Semi-Variable Costs Utilities($1/50serv) Wages($1/pers-serv)

  15. Cost per person served Servings/mon. 200 400 600 800 Lease 2000 2000 2000 2000 Dishes 300 300 300 300 Food 200 400 600 800 Paper 50 100 150 200 Utilities 4 8 12 16 Wages 200 400 600 800 Total Costs 2754 3208 3662 4116 Cost/serving 13.77 8.02 6.1 5.15

  16. Cost-Volume Relationships 4600 Variable Costs 3450 Total Costs 2300 Fixed Costs 1150 200 400 Number of Servings

  17. This is the supply side of economic analysis. The side that determines how much a business, once doing this analysis will charge as a price.The demand side is how much an individual is willing to pay for a product. As price increases.

  18. The Law of Supply and Demand, Price Equilibrium S D Price/Unit Volume and Price Equilibrium Quantity Demanded (Unit/time)

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