ENGINEERING ECONOMY

While I was working toward an Industrial Engineering degree back in the mid-1070’s I had to take a class called Engineering Economy. It was a required class for the IE program and was taught in the IE department by a professor whose name escapes me; I think we called him Captain Zoomer (his last name did begin with a “Z”) because he had a reputation of “zooming” us on exams. I found the class to be interesting and useful and could easily see applications for the material down the road. So, what is it? Below is a condensed version of Wikipedia’s definition:

“Engineering economics, previously known as engineering economy, is a subset of economics concerned with the use and “…application of economic principles”[1] in the analysis of engineering decisions.[2] As a discipline, it is focused on the branch of economics known as microeconomics in that it studies the behavior of individuals and firms in making decisions regarding the allocation of limited resources. Thus, it focuses on the decision making process, its context and environment.[1] …As a discipline though, it is closely related to others such as statistics, mathematics and cost accounting.[1] It draws upon the logical framework of economics but adds to that the analytical power of mathematics and statistics.[1]

For each problem, there are usually many possible alternatives. One option that must be considered in each analysis, and is often the choice, is the do nothing alternative. The opportunity cost of making one choice over another must also be considered. There are also non-economic factors to be considered, like color, style, public image, etc.; such factors are termed attributes.[5]”

Some key concepts in this definition include: it is an aid in the decision-making process; it is within the logical framework of economics, but adds to it the power of statistical analysis and mathematics; it provides a comparison to different alternatives to solve a problem; it assists with the allocation of limited resources (I can easily relate to that!).
One of the concepts that I particularly want to explore is that of “opportunity cost.” Below is a definition of that:

“Opportunity costs represent the benefits an individual, investor or business misses out on when choosing one alternative over another. While financial reports do not show opportunity cost, business owners can use it to make educated decisions when they have multiple options before them. Bottlenecks are often a cause of opportunity costs.
Because by definition they are unseen, opportunity costs can be easily overlooked if one is not careful. Understanding the potential missed opportunities foregone by choosing one investment over another allows for better decision-making.
KEY TAKEAWAYS
• Opportunity cost is the return of a foregone option less the return on your chosen option.
• Considering opportunity costs can guide you to more profitable decision-making.
• You must assess the relative risk of each option in addition to its potential returns.”
In other words, opportunity costs are the return you WOULD have received if you had chosen a different alternative minus the return you DID receive with the selected alternative.

 I apologize for all of that but it started me thinking about the “opportunity costs” we incur every day in the choices we make and the alternatives we select. We don’t measure these in dollars and cents, but they are there and I think are measured in terms of happiness, fulfillment, joy, and contentment. It is not unreasonable to think we all have opportunities presented to us every day; opportunities to help someone in need, to share encouragement with someone who is experiencing a difficult time, to be kind to someone who may not deserve it, or to just choose to be happy (people notice that because it seems to be rare in our society).

As in an economic analysis, the first alternative to evaluate is to do nothing. We always have that choice as well and in my experience it is the default selection. We seem to be programmed to take the “path of least resistance” and in most cases that is to do nothing. It is also the one which incurs the most opportunity cost because almost anything we could do in terms of kindness and helping someone out would be more beneficial than doing nothing.

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