chapter 1 making economic decisions 1

8/3/2019 Chapter 1 Making Economic Decisions 1

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Copyright Oxford University Press 2009

Chapter 1

Making Economic Decisions


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Types of Problems

Role of Engineering Economic Analysis

Problem-Solving / Decision-MakingProcess

Ethical Dimensions in Engineering

Decision-Making

Chapter Outline


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Distinguish between simple and complexproblems

Understand the role and purpose of engineering

economic analysis Apply problem-solving / decision making

process

Understand ethical dimension of decision-

making Solve simple problems associated with

engineering decision-making process

Learning Objectives


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In 2005, only 11 hybrid vehicle models in U.S.(~1% of auto sale)

By 2012, 52 hybrid vehicles will be available(~4.2% U.S. market) predicted by J.D. Power& Assoc.

Design Concerns: Engine power and

acceleration, fuel mileage, refuels, safety,maintenance, fuel distribution, environmentalissues, ethical issues,

Vignette: Alternative Fuel Vehicles


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What marketplace dynamics drive or suppressthe development of alternative fuel vehicles?

Develop a list of concerns and questions that

customers might have regarding the conversionto alternative fuel vehicles. Which are economicand which are non-economic factors?

Are there any ethical aspects to the conversion to

alternative fuel vehicles?

Vignette: Alternative Fuel Vehicles


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This course develops the tools to properlyanalyze and solve the economic problems thatare commonly faced by engineers.

Making Economic Decisions


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Simple Problems

Should I buy metro-rail pass or pay every time?

Should our company pay the vendor cash or credit?

Intermediate Problems

Should I buy or lease my next car?

Which CNC machine should the company purchase?

Complex Problems Feasibility study of a new automobile plant.

Planning for new highways.

A Sea of Problems


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A systematic tool for comparing alternatives bytheir economic merits. Most suitable forproblems

With importance, that require organized analysis ofthe economic aspects

Could apply to Product/Process Design,Purchase of Capital Equipment, Selection ofProjects, Investment, and many other decision-making processes.

Role ofEngineering Economic Analysis


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1. Recognize Problem / Opportunity

2. Define Goals/Objectives

3. Assemble Relevant Data

4. Identify Feasible Alts

7. Predict Alts Outcomes

8. Choose the Best Alt.9. Audit the Results

Overall Mission/ Objectives

5. Select the Criterion

6. Construct a Model

Decision-Making Process


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Decision-Making Process1. Recognize Problem / Opportunity

Needs for New Products, Processes, orFacilities

Improvement of Products, Processes, or

Facilities (TQM, CI)

SWOT (Strengths, Weaknesses, Opportunities,and Threats) Analysis

Investment/Financing


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Decision-Making Process2. Define Goals/Objectives

General or specific goals

Systems perspective

Limiting factors Multiple goals

Conflicting goals


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Decision-Making Process3. Assemble Relevant Data

Importance of Data Collection Relevance of Information Dollar Amount and Time Horizon

Sources of Information Financial Accounting System Cost Accounting Records Market Research

Quotations Economic Indicators Other Published Information


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Example 1-1Assemble Relevant Data

Vast information What is relevant?

From whos viewpoint? From the Manager of Shipping Dept. Alt. 1 $793.00 /30,000 copies (Printing Dept.) vs. Alt. 2 $688.00 /30,000 copies (Comm. Printer)

From General Manager Alt. 1 $793.50 / mo (Printing Dept.) vs. Alt. 2 ($793.50 - $294.00) + 688.50 / mo (Comm.

Printer)


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Decision-Making Process3. Assemble Relevant Data

Financial Consequences (Costs & Benefits):

Market Consequences: has established prices

Extra-Market Consequences: prices could beassigned by indirect means

Intangible Consequences: social impacts,environmental impacts, etc.


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Decision-Making Process4. Identify Feasible Alternatives

Include as many as possible alternatives:

Do-nothing option

Simple solutions

Bounded rationality Number of alternatives


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Decision-Making Process5. Select the Criterion

Multiple criteria

Conflicting criteria

Integrating criteria Most common criterion Maximize profit

Category Economic Criterion

Fixed input Maximize the benefits or other outputs

Fixed output Minimize the costs or other inputs

Neither inputnor output fixed

Maximize the profits (Value of outputs cost of inputs)


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Decision-Making Process6. Construct Models

Real systems and models

A model describes the interrelationships amongthe relevant data and predicts the outcomes ofvarious alternatives.


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Decision-Making Process7. Predict Alternatives Outcomes

Comparable outcomes

Single criterion

Single composite criterion

Risk and uncertainty

Search for more information (loop)

Modification of alternatives (loop)


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Decision-Making Process8. Choose Best Alternative(s)

Selection criterion

Other intangible considerations


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Decision-Making Process9. Audit the Results

Reality vs. prediction

Learn from mistakes

Replacement analysis


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Ethics

The concept of distinguishing between right andwrong in decision-making.

Ethics includes:

Establishing systems of beliefs and moral obligations

Defining values and fairness

Determining duty and guidelines for conduct


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Code of EthicsNational Soc. of Professional Eng.

Engineers, in the fulfillment of their professional duties, shall:

1. Hold paramount the safety, health, and welfare of thepublic.

2. Perform services only in areas of their competence.

3. Issue public statements only in an objective and truthfulmanner.

4. Act for each employer or client as faithful agents ortrustees.

5. Avoid deceptive acts.6. Conduct themselves honorably, responsibly, ethically,

and lawfully so as to enhance the honor, reputation, andusefulness of the profession. (http://www.nspe.org/ethics/eh1-code.asp)


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Ethical Dimensions inEngineering Decision-Making

Decision Process Step Example Ethical Lapses

1. Recognize the problem Looking the other way , or not torecognize the problem due to bribes orfear of retribution

2. Define goals/objectives Favoring one group of stakeholders byfocusing on their objective

3. Assemble relevant data Using faulty or inaccurate data

4. Identify feasible alts. Leaving legitimate alts out ofconsideration

5. Select criterion todetermine best alt

Considering only monetary consequenceswhen other significant consequences exist


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Ethical Dimensions inEngineering Decision-Making

Decision Process Step Example Ethical Lapses

6. Construct a model Using a short horizon that favors one altover another

7. Predict alts outcomes Using optimistic estimates for one alt andpessimistic ones for the other alts

8. Choose the best alt Choosing an inferior alt, one that isunsafe, adds unnecessary cost for user,harms the environment

9. Audit the result Hiding past mistakes


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Ethics inEngineering Economic Analysis

How well and how honestly the decision-makingprocess is conducted the data, method ofanalysis, recommendations, and follow-up

Recognize ethical issues exist and make them anexplicit part of decision-making process


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Decision-Making for CurrentCosts

If results of the decision occur in a veryshort period of time, costs and benefits

can be added up quickly. Using suitable economic criterion, the

best alt can be identified.


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Decision-Making for CurrentCosts

Example 1-2

Linear Programming Model

Minimize $3.00X + $4.40YSubject to: (0.25)X + (0.40)Y u 0.31

X + Y = 1

X, Yu

0where X = portion from 1st source of material

Y = portion from 2nd source of material


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Example 1-3Decision-Making for Current Costs

Concept of Sunk Cost

Only the remaining production is considered

Is the assumption of other costs asvariable reasonable?


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Example 1-4Decision-Making for Current Costs

Intangible constraint

The thickness of wall space

Further study Trade-off between insulation and energy cost

chapter 1 making economic decisions 1

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