Engineering Economics

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13 Engineering Economics

1.0 INTRODUCTION
The broad field of economics may be divided into macro and micro economics. Macroeconomics involves problems associated with nations such as trade, trade deficits, monetary policy, national productivity, growth of the economy, inflation, budget deficits, national debt, unemployment, tariffs, etc. Microeconomics involves problems of firms and of individuals. Engineering economics is a special branch of microeconomics largely involved with the analysis of engineering alternatives and their performance. The two most important macroeconomic theories are those espoused by Adam Smith (1723–1790) and J. M. Keynes (1883–1946): • Smith suggested (Wealth of Nations, 1776) that a free economy driven by market forces and free of government intervention is best. • Keynes suggested (General Theory of Employment, Interest, and Money, 1936) that government intervention is important, particularly in times of economic stagnation and inflation. His views had a strong influence on actions taken by President Roosevelt in formulating “The New Deal” of the 1930s. 357

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Engineering Problem Solving: A Classical Perspective

Debate continues today, fueled by those two points of view, on the basic question of whether the nation is better served by a big or small federal government? The cost of designing, producing, or using an engineering structure or device is an extremely important engineering variable and should be quantitatively treated just as carefully as strength, rigidity, output, or efficiency. There is no more compelling reason for basing the solutions to engineering economic problems on hunch than there is for adopting such an approach in making any other type of engineering decision. Many engineering economics problems involve the choice, based upon cost, between two or more alternative solutions. When the alternatives are not exactly identical, it is necessary to assign a money value to differences which exist. When these differences are intangible, this may call for considerable judgment. When considering alternative solutions involving different costs, it is important that none of the possibilities be overlooked. Accounting is not to be confused with engineering economics. While accounting is concerned with the apportionment of costs and what money spent was actually used to achieve an end, engineering economics is concerned with the cost of alternative solutions to a problem, mainly projected into the future. It is important to recognize that economic considerations may lead to a design or structure that is less perfect than could be achieved if costs were not considered. For example, it may be advisable to specify a piece of energy conversion equipment that operates at an efficiency that is less than the maximum attainable value, provided in so doing the actual unit cost of power is less over the life of the machine. The cost of achieving the last increment of improvement frequently costs more than the average unit cost and, in such cases, it usually is not justifiable to include this last increment of output when designing the device. Despite these observations, many textbooks on hydraulic machinery and similar equipment discuss the problem of choosing the type of machine best suited to a given set of operating conditions (head, flow rate, speed, etc.) from the standpoint of efficiency without regard for the relative costs involved in the several designs. This infers that the engineer’s job is to design or to select a machine that operates at maximum efficiency, regardless of cost. While this may be the case under special circumstances (for example, where the weight of the device is of major importance), the more usual situation corresponds to the case where the best solution is a minimum overall unit

Engineering Economics

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cost without regard for efficiency or other secondary variables except as they influence unit cost. Frequently, a design variable that effects...
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