ECONOMIC ENGINEERING: HISTORY, PRINCIPLES AND APPLICATIONS - ECONOMY - 2025

The economic engineering is a subset of the economy interested in the use and application of economic principles in analyzing 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, as 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 by nature, integrating economic theory with engineering practice, but it is also a simplified application of microeconomic theory. Avoid 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 investigate solutions to difficulties, and the economic feasibility of each viable solution is usually considered, along with technical aspects. Essentially, engineering economics involves estimating, formulating, and evaluating economic results when there are adequate options to achieve a defined purpose.

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

History

Economic engineering had its origin due to the existing need to be able to create projects that had 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 depended on financial and actuarial mathematics.

In 1930 Eugene L. Grant, in his textbook Principles of Economic Engineering, explained the importance of evaluating judgment factors and short-term investment, as well as making the usual comparisons of long-term investment in capital goods, based on in calculating compound interest.

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

Beginning

Develop the alternatives

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

Focus on differences

Only the differences in expected future outcomes between the alternatives are relevant for comparison and should be considered in the decision.

Use a consistent point of view

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

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 the alternatives. It should be recognized in your analysis and comparison.

Consider all relevant criteria

Selecting 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 measure, or show them descriptively.

Review decisions

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

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

Special features of economic engineering

- It is closely aligned with conventional microeconomics.

- It is dedicated to solving problems and making decisions in the operational field.

- It can lead to the 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. Eliminate complicated abstract problems in economic theory.

- It mainly uses the set of economic concepts and principles.

- Integrate 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.

Decisions therefore 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, directors of large companies, and heads of government agencies are routinely challenged to make important decisions to choose one alternative over another.

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

Another way of explaining economic engineering is that it is a compilation of mathematical techniques that greatly facilitate economic comparisons.

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

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

- Amortization period: number of years to recover the initial investment with an established rate of return.

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

- Benefit / cost ratio.

For each problem, there are generally many possible alternatives. One option to consider in each analysis, and one that is frequently chosen, 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 color, style, and public image; such factors are called attributes.

Applications

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

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

Analysis of values

Procedure for analyzing products, from a 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.

Critical path economics

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 "paths" are those that affect the outcome both in time and cost. Economic engineering 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, the differences between own and foreign capital, the economic effects of the different financing methods and the setting of attractive minimum returns for various risk categories are established.

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 submerged costs

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

Replacement studies

Study the reasons for replacement, the factors to consider, and the investment value of existing assets. Methods are also applied to manage 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 the production lot, the effects of risk and uncertainty in the lot size, the effects of the lot size on the decision to produce rather than buy, and the production schedule to satisfy a variable demand.

References

1. Wikipedia, the free encyclopedia (2018). Engineering economics. Taken from: en.wikipedia.org.
2. Shivam (2018). Engineering Economics: Meaning and Characteristics. Economics Discussion. Taken from: economicsdiscussion.net.
3. Course Hero (2018). Importance of Engineering Economy. Taken from: com.
4. Wikipedia (2018). Economic engineering. Taken from: es.wikipedia.org.
5. Daniela Cuj Ramirez (2011). Origins of Economic Engineering. ITVH-DCCR-engineering-economics. Taken from: itvh-dccr-ingenieria-economica.blogspot.com.
6. Paul De Garmo and John Canada (1973). Economic engineering. Continental publishing company.