EEE 452: Engineering Economics

and Management
Lec 02: Roles of Engineers and Rational
Decision Making
Faculty: Dr. Rokonuzzaman
E-mail: zaman.rokon@yahoo.com
https://bd.linkedin.com/in/zamanrokon

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 Let’s think
1. Who is willing to work without pay?
2. How much to be paid?
1. Why should an engineering be paid for a job?
2. How much to be paid?
3. How to be paid more?
4. How to create high paying jobs for engineers?

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 What Engineers Do?
“Apply the principles of science and mathematics to develop
economical solutions to technical problems”
Design products (and services)
Build and test these products
Design plants in which those products are made
Design systems that ensure the quality and efficiency of the
manufacturing process
Analyze systems to evaluate their performance
Develop software to control systems
Innovate to improve performance of existing systems
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 Opening Story - Bose Corporation
• Dr. Amar Bose, a graduate of electrical engineering, an
MIT professor, and Chairman of Bose Corporation.
• He invented a directional home speaker system that
reproduces the concert experience.
• He formed Bose Corporation in 1964 and became the
world’s No.1 speaker maker.
• He became the 288th wealthiest American in 2002 by
Forbes magazine.
• Having access to strategic technology is good enough to
build a profitable business?

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 Mobile phone industry in BD
• Story 2:
– GP has developed a business of more than US$1 billion in
revenue in a least developed country like Bangladesh.
– GP’s EPS is more than 10
– GP develops, sells and updates a number of voice and data
products
• How does GP manage investment decision?
• How does GP determine price of products?
• Is there policy implication on GP’s business?
• How to decide about timing of product roll out?
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• What are major functions of GP for building
profitable large scale telecom service
business?
• Is technology knowledge enough?

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How to invest at profit to make systematic
improvements?
(improvement = year-over-year increase in capabilities)

Service System
1. People (division of labor, multi-tasking)
2. Technology
3. Internal and External Service Systems
Connected by Value Propositions
Computational System 4. Shared Information (language, laws, measures)

Shrink Transistors People do more, high value win-win actions

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 Engineering Economics
Overview
• Rational Decision-Making Process
• Economic Decisions
• Predicting Future
• Role of Engineers in Business
• Large-scale engineering projects
• Types of strategic engineering economic
decisions

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

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 Engineering Economic Decisions

Manufacturing or production Profit

Planning Investment

How long GP requires to see profit after Marketing

recovering the investment?
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 Predicting the Future
• Estimating a Required
investment
• Forecasting a product
demand
• Estimating a selling price
• Estimating a
manufacturing cost
• Estimating a product life

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 Role of Engineers in Business
Create & Design

• Engineering Projects

Evaluate
Analyze Evaluate
• Expected
• Production Methods Profitability • Impact on
• Engineering Safety • Timing of Financial Statements
• Environmental Impacts Cash Flows • Firm’s Market Value
• Market Assessment • Degree of • Stock Price
Financial Risk

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 Two Factors in Engineering Economic
Decisions

The factors of time and uncertainty are

the defining aspects of any engineering
economic decisions

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 Equipment Replacement Problem
• Now is the time to
replace the old machine?
• If not, when is the right
time to replace the old
equipment?
• Is it the time to replace all
microwave links of GP
with fiber optics ones?

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 What do engineers do?
• Engineers manage product life cycle

Sales and
Profits ($)
Sales

Profits

Time
Product Introduction Growth Maturity Decline
Develop-
ment
Losses/
Investments ($)

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How to manage the life cycle of this
product?

Honda began developing humanoid robots in

the 1980s, including several prototypes that
preceded ASIMO. It was the company's goal to
create a walking robot which could not only
adapt and interact in human situations, but
also improve the quality of life.

Introduced in 2000, the first version of ASIMO

was designed to function in a human
environment, which would enable it to better
assist people in real-world situations. Since
then, several updated models have been
produced to improve upon its original abilities
of carrying out mobility assistance tasks. A new
ASIMO was introduced in 2005, with an
increased running speed to 3.7 mph, which is
twice as fast as the original robot. 16
 New Product and Product Expansion
• Shall we build or acquire
a new facility to meet the
increased demand?
• Is it worth spending
money to market a new
product?

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 Example - MACH 3 Project
• R&D investment: $750 million
• Product promotion through
advertising: $300 million
• Priced to sell at 35% higher
than Sensor Excel (about $1.50 Gillette’s MACH3
extra per shave). Project
• Question 1: Would consumers
pay $1.50 extra for a shave
with greater smoothness and
less irritation?
• Question 2: What would
happen if the blade
consumption dropped more
than 10% due to the longer
blade life of the new razor?

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 Fundamental Principles of Engineering
Economics
• Principle 1: A nearby dollar is worth more
than a distant dollar
• Principle 2: All it counts is the differences
among alternatives
• Principle 3: Marginal revenue must exceed
marginal cost
• Principle 4: Additional risk is not taken
without the expected additional return

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Principle #1: People Face Tradeoffs.

To get one thing, we usually have to give

up another thing.
– Guns v. butter
– Food v. clothing
– Leisure time v. work
– Efficiency v. equity

Making decisions requires trading

off one goal against another.
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 Principle #2: The Cost of Something Is What
You Give Up to Get It.

• Decisions require comparing costs and benefits

of alternatives.
– Whether to go to college or to work?
– Whether to study or go out on a date?
– Whether to go to class or sleep in?
• The opportunity cost of an item is what you
give up to obtain that item.
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 Principle #3: Rational People Think at the
Margin.
• Marginal changes are small, incremental
adjustments to an existing plan of action.

People make decisions by comparing

costs and benefits at the margin.

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Principle #4: People Respond to Incentives.

• Marginal changes in costs or benefits

motivate people to respond.
• The decision to choose one alternative
over another occurs when that
alternative’s marginal benefits exceed
its marginal costs!

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Principle #5: Trade Can Make Everyone
Better Off.

• People gain from their ability to trade

with one another.
• Competition results in gains from
trading.
• Trade allows people to specialize in
what they do best.

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Principle #6: Markets Are Usually a Good
Way to Organize Economic Activity.

• A market economy is an economy that

allocates resources through the
decentralized decisions of many firms and
households as they interact in markets for
goods and services.
– Households decide what to buy and who to
work for.
– Firms decide who to hire and what to produce.

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 Principle #6: Markets Are Usually a Good
Way to Organize Economic Activity.

• Adam Smith made the observation that

households and firms interacting in markets act
as if guided by an “invisible hand.”
– Because households and firms look at prices when
deciding what to buy and sell, they unknowingly
take into account the social costs of their actions.
– As a result, prices guide decision makers to reach
outcomes that tend to maximize the welfare of
society as a whole.
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 Principle #7: Governments Can Sometimes
Improve Market Outcomes.

• Market failure occurs when the market fails to

allocate resources efficiently.
• When the market fails (breaks down)
government can intervene to promote efficiency
and equity.

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 Principle #7: Governments Can Sometimes
Improve Market Outcomes.

• Market failure may be caused by

– an externality, which is the impact of one person or
firm’s actions on the well-being of a bystander.
– market power, which is the ability of a single
person or firm to unduly influence market prices.

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Principle #8: The Standard of Living
Depends on a Country’s Production.

• Standard of living may be measured in

different ways:
– By comparing personal incomes.
– By comparing the total market value of a
nation’s production.

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 Principle #8: The Standard of Living
Depends on a Country’s Production.

• Almost all variations in living standards are

explained by differences in countries’
productivities.
• Productivity is the amount of goods and
services produced from each hour of a worker’s
time.

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 Principle #8: The Standard of Living
Depends on a Country’s Production.
• Standard of living may be measured in different
ways:
– By comparing personal incomes.
– By comparing the total market value of a nation’s
production.

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Principle #9: Prices Rise When the
Government Prints Too Much Money.

• Inflation is an increase in the overall

level of prices in the economy.
• One cause of inflation is the growth in
the quantity of money.
• When the government creates large
quantities of money, the value of the
money falls.

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Principle #10: Society Faces a Short-run
Tradeoff Between Inflation and Unemployment.

• The Phillips Curve illustrates the

tradeoff between inflation and
unemployment:
òInflation ð ñUnemployment
It’s a short-run tradeoff!

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 Summary
• When individuals make decisions, they face
tradeoffs among alternative goals.
• The cost of any action is measured in terms of
foregone opportunities.
• Rational people make decisions by comparing
marginal costs and marginal benefits.
• People change their behavior in response to the
incentives they face.

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