Ages ago, the most significant barriers to engineers were technological. The things that engineers wanted to do, they simply did not yet know how to do, or hadn’t yet developed the tools to do. There are certainly many more challenges like this which face present-day engineers. However, we have reached the point in engineering where it is no longer possible, in most cases, simply to design and build things for the sake simply of designing and building them. Natural resources (from which we must build things) are becoming more scarce and more expensive. We are much more aware of negative side-effects of engineering innovations (such as air pollution from automobiles) than ever before.
For these reasons, engineers are tasked more and more to place their project ideas within the larger framework of the environment within a specific planet, country, or region. Engineers must ask themselves if a particular project will offer some net benefit to the people who will be affected by the project, after considering its inherent benefits, plus any negative side-effects (externalities), plus the cost of consuming natural resources, both in the price that must be paid for them and the realization that once they are used for that project, they will no longer be available for any other project(s).
Simply put, engineers must decide if the benefits of a project exceed its costs, and must make this comparison in a unified framework. The framework within which to make this comparison is the field of engineering economics, which strives to answer exactly these questions, and perhaps more. The Accreditation Board for Engineering and Technology (ABET) states that engineering “is the profession in which a knowledge of the mathematical and natural sciences gained by study, experience, and practice is applied with judgment to develop ways to utilize, economically, the materials and forces of nature for the benefit of mankind”.1
It should be clear from this discussion that consideration of economic factors is as important as regard for the physical laws and science that determine what can be accomplished with engineering. The following figure shows how engineering is composed of physical and economic components:
Figure 1 : Physical and Economic Components of an Engineering System
Figure 1 shows how engineering is composed of physical and economic components.
Physical Environment : Engineers produce products and services depending on physical laws (e.g. Ohm’s law; Newton’s law).
Physical efficiency takes the form:
system output(s)
Physical (efficiency ) = ——————-
system input(s)
Economic Environment : Much less of a quantitative nature is known about economic environments — this is due to economics being involved with the actions of people, and the structure of organizations.
Satisfaction of the physical and economic environments is linked through production and construction processes. Engineers need to manipulate systems to achieve a balance in attributes in both the physical and economic environments, and within the bounds of limited resources. Following are some examples where engineering economy plays a crucial role:
Ø Choosing the best design for a high-efficiency gas furnace
Ø Selecting the most suitable robot for a welding operation on an automotive assembly line
Ø Making a recommendation about whether jet airplanes for an overnight delivery service should be purchased or leased
Ø Considering the choice between reusable and disposable bottles for high-demand beverages
With items 1 and 2 in particular, note that coursework in engineering should provide sufficient means to determine a good design for a furnace, or a suitable robot for an assembly line, but it is the economic evaluation that allows the further definition of a best design or the most suitable robot.
In item 1 of the list above, what is meant by ” high-efficiency”? There are two kinds of efficiency that engineers must be concerned with. The first is physical efficiency, which takes the form:
System output(s)
Economic (efficiency ) = —————–
System input(s)
For the furnace, the system outputs might be measured in units of heat energy, and the inputs in units of electrical energy, and if these units are consistent, then physical efficiency is measured as a ratio between zero and one. Certain laws of physics (e.g., conservation of energy) dictate that the output from a system can never exceed the input to a system, if these are measured in consistent units. All a particular system can do is change from one form of energy (e.g. electrical) to another (e.g., heat). There are losses incurred along the way, due to electrical resistance, friction, etc., which always yield efficiencies less than one. In an automobile, for example, 10-15% of the energy supplied by the fuel might be consumed simply overcoming the internal friction of the engine. A perfectly efficient system would be the theoretically impossible Perpetual Motion Machine!
The other form of efficiency of interest to engineers is economic efficiency, which takes the form:
system worth
Economic (efficiency ) = —————–
system cost
You might have heard economic efficiency referred to as “benefit-cost ratio”. Both terms of this ratio are assumed to be of monetary units, such as dollars. In contrast to physical efficiency, economic efficiency can exceed unity, and in fact should, if a project is to be deemed economically feasible. The most difficult part of determining economic efficiency is accounting for all the factors which might be considered benefits or costs of a particular project, and converting these benefits or costs into a monetary equivalent. Consider for example a transportation construction project which promises to reduce everyone’s travel time to work. How do we place a value on that travel time savings? This is one of the fundamental questions of engineering economics.
