INTRODUCTION TO ECONOMIC ENGINEERING

Engineers are planners and builders; they are also people who solve problems,
manage, and decisions made. Economic engineering covers each of these activities.
An economist engineer relies on the accumulated knowledge of engineering and
economics to identify alternative uses of limited resources and to select the most
suitable course.

1.1 THE DECISION MAKERS IN THE ENGINEERING

There are two features that we can find frequently in situations that an engineer is
faced, the first is at the choice among a set of alternatives; Second, all involve
economic elements.
These features are included in decision-making of engineers economists function
for:
1. Identify the alternative uses of limited resources and obtain the appropriate
data.

2. Analyze the data to determine the preferable alternative.

The extent of the problems, the depth of analysis and the scope of application that
an engineer is in practice vary considerably.

A decision is the simple choice made from two or more courses of action, either in
construction or production operations, services and manufacturing industries, public
or private agencies. Some elections are mostly automatic or trivial, but, as we have
seen, other decisions can be exciting experiences and that represent a challenge.
Most of the important decisions, including the personal, have economic nuances.

1.2 ENGINEERING AND ECONOMICS

Before 1940, the main concern of engineers was the design, construction and
operation of machines, structures and processes. They paid less attention to the
human and physical resources manufacturing finished products. Many factors
contributed to the extension of the responsibilities and interests of engineering since
then.
Now expected that engineers not only to generate innovative technological solutions,
but also to conduct financial analysis reflecting the effects of the implementation.
The majority of the definitions of engineering suggest that engineers mission is to
transform the nature resources into benefits for the human race.
The focus of scarce resources attached to engineering with the economy.
Paul A. Samuelson, Nobel Prize in Economics, and William D. Nordhaus indicated
that;
Economics is the study of the way in which people and society choose to use
scarce resources that have alternative uses in order to produce various goods
 and distribute them to their consumption, present or future, between various
groups and people in the society.

The "laws" of Economics, in its application to the production and use of scarce
resources ensure increasing attention of engineers.

1.3 ECONOMY: A BRIEF REVIEW

The economy, such as engineering, has deep informal roots in
history. Considered that the construction of the pyramids was a marvel of
engineering. He was also an important economic achievement since it concentrated
all the resources on the monuments, rather than consuming them in the trade.
The economy, such as engineering, has deep informal roots in history.
Considered that the construction of the pyramids was a marvel of engineering. He
was also an important economic achievement since it concentrated all the resources
on the monuments, rather than consuming them in the trade.
The theories of Keynes and Marx analyzed the entire economic system with
respect to national income, cash flow, consumption, investment, wages and General
prices. This level of analysis, worried about the economy as a whole, receives the
name of macroeconomics.
Microeconomics is the study of economic behavior in very small segments of the
economy, such as a company or home.
Economic engineering, with its focus on economic decision-making in a single
organizational unit, is in close alignment with microeconomics.

1.4 ECONOMIC ENGINEERING: A SHORT HISTORY

Civil engineer Wellington argued that the capitalized cost analysis method should be
used to select the ideal lengths for the railway lines or the curvature of the lines. It
captured the essence of economic engineering of delicious way:

It would be nice if engineering is conceived in a less general way, and even

defined as the art of building. In a true and important sense, rather is the art
to build or to define it in a crude manner not inapt, is the art of making that
well with a dollar any inept excavator can do with two dollars.

In the Decade of 1920, C.L. Fish and O.B. Goldman analyzed investments in
structures designed from the point of view of actuarial mathematics.
In Financial Engineering, Goldman Sachs proposed a procedure of compound
interest to determine the comparative values, i.e., to get the greatest possible
number of dollars and cents to achieve better financial efficiency.

The confines of the classical economic engineering were drawn in 1930 by the
father of Eugene L. Grant Principies of Engineering Economy in economic
engineering. Grant looked at the importance of factors of judgment and
assessment of the investment in the short term, as well as conventional
comparisons of long-term investments.

Current flows are expanding the frontiers of economic engineering to embrace new
methods of risk, sensitivity analysis and intangibles.

1.5 PROBLEM SOLVING AND DECISION MAKING

An economic engineer is based on the accumulated knowledge of engineering and

economics to design and employ tools to identify a preferred course of action.
There are different aspects and different ways of considering them.
The fundamental approach to the solution of economic problems is to develop the
traditional scientific method. In general, this activity is a prognosis.

The process of problem solving

The problem is limited and enlightened

by the data coming from the real world.
This information is combined with
scientific principles provided by the
analyst to formulate a hypothesis in
symbolic terms.

1.5.1 INTUITION AND ANALYSIS

When the decision is superficial, and the results are not very important, it is
possible to get a similar response based on intuition. The instinctive judgements
are generally formalized with standard procedures of operation (PEO). In the
economic analysis, the PEO frequently take the form of spreadsheets to justify the
investment.

The decision-making process

Assessments of economic engineering
seem to even mundane, since they
usually rely on data coming from the
market and technology, available in the
archives, simply take a catalog prices,
introduce them in a practical formula and
is Gets a response-. Sometimes, this
routine works.
 The most important problems require both analysis and personal judgment.
Initially, the analyst decides which assessment technique used and how will apply it.
Intuitive nesting is often assigned to intangible assets to allow them to be included
in the decision-making process. The trial also enters the process to determine
whether a solution is well founded to be accepted. Thus, intuition and judgment
complement analysis methods to contribute to better decisions.

1.5.2 TACTICS AND STRATEGY

Criteria for responses to an

economic problem

Three possible parameters to

identify the responses of routine. The
level that separates an automatic
decision of a problem requiring more
research varies between each of the
decision makers.

A problem is often ill-defined and the analyst sees the need to find a solution
before applying analytical tools. The recognition of the difference between the
strategic and the tactical considerations perhaps clarify the purpose.
The strategy sets objectives, and associated tactics defines the multiple
maneuvers required to achieve such goals. Strategic and tactical considerations
have essentially the same meaning to the economic studies.

The relative values of the tactical choices are classified according to their
efficiency - the extent to which an operation carries out a mission within the economic
expectations.
The relationship between strategies and tactics offers some constructive
judgments. The effectiveness of each strategy is initially calculated from the effect
that it will have on the objectives of the system.
The real efficiency of each tactic is determined from a study of the activities required
to drive the tactical operation.
1.5.3 SENSITIVITY AND SUB-OPTIMIZATION

A sensitivity analysis can be done on any problem to explore the effects of

the deviations from the original conditions of the problem. Since the majority of
economic engineering problems cover a period of several years, it is necessary to
estimate future cash flows. These calculations can be very reliable, but often it is
important to note the way in which the attractiveness of alternatives varies as initial
estimates change.

In general, the sub-optimization occurs when there is one major problem

that the analyst had not contemplated. It is always tempting to use a classic text
book solution to a problem in the real world, whether it fits or not to actual
conditions. The availability of computerized solutions "stereotyped" to complex
problems, increases the temptation. Another cause of sub-optimal solutions is
approved analysis technique, which consists of dividing a large problem into a set
of smaller interdependent problems during a preliminary investigation, to avoid
being stuck in a torrent of details.

Three perspectives that are frequently and that can lead to the sub-optimization:

 The crisscross perspective. Both organizations and individuals can be

confused with opposed objectives.

 Short-sighted perspective. Tactics based on a 1 or 2 year planning

horizon may not have the same efficiency than those based in more years.

 The perspective of tunnel vision. Organizations are very susceptible to

situations where departments understand the common goal, but individually
they work in such a way that damage this objective.