11 julio, 2024

Economic engineering: what it is, history, principles, applications

What is economic engineering?

The economic engineering It is a subset of economics interested in the use and application of economic principles in the analysis of engineering decisions. This practice involves evaluating the costs and benefits of proposed projects.

As a discipline, it focuses on the branch of economics known as microeconomics, since it studies the behavior of individuals and companies when making decisions regarding the allocation of limited resources. Therefore, it focuses on the decision-making process, its context and environment.

It is pragmatic in nature, integrating economic theory with engineering practice, but it is also a simplified application of microeconomic theory. It avoids a number of microeconomic concepts, such as pricing, competition, and demand/supply.

However, as a discipline it is closely related to others such as statistics, mathematics and cost accounting. It is based on the logical framework of economics, but adds to that the analytical power of mathematics and statistics.

Engineers search for solutions to difficulties and the economic feasibility of each viable solution is normally considered along with the technical aspects. Essentially, engineering economics involves estimating, formulating, and evaluating economic outcomes when there are suitable options to achieve a defined purpose.

Some additional topics that may be encountered in engineering economics are uncertainty, inflation, replacements, resource depletion, depreciation, tax credits, taxes, cost estimates, accounting, and capital financing.

History

Economic engineering had its origin due to the existing need to be able to create projects that had a high profitability, where high-quality work could be carried out, but at the same time their costs were reduced.

It can be said that the pioneer of economic engineering was the civil engineer Arthur M. Wellington, who at the end of the 19th century referred to the role of economic analysis in engineering projects mainly in his area of ​​interest, which was the construction of railways. .

This initial contribution was followed by other contributions that emphasized techniques that relied on financial and actuarial mathematics.

In 1930 Eugene L. Grant, in his textbook Principles of economic engineering He exposed the importance of evaluating the judgment factors and short-term investment, as well as making the usual comparisons of long-term investment in capital goods, based on the calculation of compound interest.

Thanks to that book, Eugene L. Grant could be called the father of engineering economics. Later, in 1942 the authors Woods and De Garmo published their book called Economic engineering.

Principles of economic engineering

develop the alternatives

The final choice (decision) is among the alternatives. Alternatives must be identified and then defined for further analysis.

focus on differences

Only the differences in the expected future results between the alternatives are relevant for their comparison and must be considered in the decision.

Use a consistent point of view

The potential outcomes of the alternatives, economic and otherwise, from a defined perspective or point of view, must be consistently developed.

Use a common unit of measure

Using a common unit of measure to list as many possible outcomes as possible will make it easier to analyze and compare the alternatives.

Make uncertainty explicit

Uncertainty is inherent in projecting (or estimating) the future results of alternatives. It should be recognized in your analysis and comparison.

Consider all relevant criteria

The selection of a preferred alternative (decision making) requires the use of a criterion (or several criteria).

The decision process must take into account the results, either in monetary units or another unit of measurement, or show them descriptively.

review decisions

As far as possible, from an adaptive process the optimal decision-making procedure is created.

The results that were launched at the beginning on the option taken should be compared later with the actual results that have been achieved.

Special features of economic engineering

– It is closely aligned with conventional microeconomics.

– Dedicated to solving problems and making decisions in the operational sphere.

– It can lead to suboptimization of the conditions in which a solution satisfies tactical objectives at the expense of strategic effectiveness.

– It is useful to identify alternative uses of limited resources and to select the preferred course of action.

– It is pragmatic in nature. It eliminates the complicated abstract problems of economic theory.

– Mainly uses the set of economic concepts and principles.

– Integrates economic theory with engineering practice.

Importance

There are many factors that are considered when making decisions, these factors are a combination of economic and non-economic factors. Engineers play an important role in investment by making decisions based on economic analysis and design considerations.

Therefore, the decisions often reflect the engineer’s choice of how best to invest the funds, choosing the most suitable alternative from a set of alternatives.

Individuals—small business owners, heads of large companies, and heads of government agencies—are routinely faced with the challenge of making important decisions to choose one alternative over another.

These are decisions about how best to invest the funds or capital of the business and its owners. Simply put, engineering economics refers to establishing the criteria and economic factors that are used when thinking about choosing one or more options.

Another way to explain engineering economics is that it is a collection of mathematical techniques that greatly facilitate economic comparisons.

With the methods of economic engineering, a meaningful and rational technique can be deployed to evaluate the economic aspects of the different methodologies, in order to achieve a certain objective.

Role of economic engineering for decision making

The economic evaluation of the alternatives is based on the so-called «measure of value» as follows:

– Present value: amount of money at the present moment.

– Future value: amount of money at some future time.

– Amortization period: number of years to recover the initial investment with a set rate of return.

– Rate of return: compound interest rate on unpaid or unrecovered balances.

– Benefit/cost ratio.

For each problem, there are usually many possible alternatives. An option to consider in each analysis, and which is frequently the chosen one, is the alternative of doing nothing.

The opportunity cost of making one choice over another must also be considered. There are non-economic factors that must also be considered, such as colour, style and public image; such factors are called attributes.

Applications

Some examples of engineering economic problems range from value analysis to economic studies. Each is relevant in different situations, and they are the most used by engineers or project managers.

For example, engineering economic analysis helps a company not only determine the difference between the fixed and incremental costs of certain operations, but also calculate that cost, depending on a number of variables. Other applications of economic engineering are the following:

stock analysis

Procedure to analyze products, from the design point of view, in order to determine and improve their economic value.

Linear programming

Determine the alternative or optimal solution of complex problems or projects by means of the linear programming technique, such as the simplex method.

Economics of the critical path

It is necessary in most situations, since it is the coordination and planning of the movements of materials, capital and labor in a specific project.

The most critical of these “pathways” are those that affect the outcome in both time and cost. Engineering economics helps provide Gantt charts and activity event networks to determine the correct use of time and resources.

Interest and money-time relationships

Economic engineering helps determine the return on money and the productivity of capital, what interest rate should be applied, the present and future value of money, among other elements.

depreciation and valuation

Define the value for setting rates, determine which depreciation method should be used and its accounting treatment.

Financing and capital budgeting

Capital financing is established, the differences between own capital and foreign capital, the economic effects of the different financing methods and the setting of attractive minimum returns for various risk categories.

Risk, uncertainty and sensitivity analysis

It includes risk assessment, break-even and uncertainty analysis, decision rules for complete uncertainty, and decision making.

Fixed, incremental and sunk costs

It covers methods for making incremental cost studies, capacity, load, and diversity factors, economic decisions regarding plant closures, and pricing based on incremental costs.

replacement studios

Study the reasons for replacement, factors to consider, and the investment value of existing assets. Methods are also applied for handling losses due to unamortized values, the remaining life of the existing asset.

Minimum Cost Formulas

It includes the economic size of the purchase order and production lot, the effects of risk and uncertainty on lot size, the effects of lot size on the make-versus-buy decision, and the production schedule to satisfy a variable demand.

Deja una respuesta

Tu dirección de correo electrónico no será publicada. Los campos obligatorios están marcados con *