Engineering economics is the application of economic techniques to the evaluation of design and engineering alternatives. The role of engineering economics is to assess the appropriateness of a given project, estimate its value, and justify it from an engineering standpoint.
Engineering economics, previously known as engineering economy, is a subset of economics concerned with the use and "...application of economic principles" in the analysis of engineering decisions. 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. It is pragmatic by nature, integrating economic theory with engineering practice. But it is also a simplified application of micro-economic theory in that it avoids a number of micro-economic concepts such as price determination, competition and demand/supply. As a discipline though, it is closely related to others such as Statistics, Mathematics and Cost Accounting. It draws upon the logical framework of economics but adds to that the analytical power of mathematics and statistics.
The Seven Principles of Engineering Economics
Each of the seven principles of engineering economics moves you a step closer toward making an economics-related decision. The first two principles -- making a list of alternatives and identifying the differences between each alternative -- set up the thought process. The next three principles focus on evaluation criteria. These include establishing consistent evaluation criteria, developing common performance measurements and considering all relevant monetary and non-monetary criteria. The final two principles focus on analysis. These include weighing risks against potential rewards and performance monitoring.
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