MECH 431

General Economic Concepts

Updated 2018-05-15

Lesson 2: General Economic Concepts

Fundamentally, economics is a study of scarcity - the limit of resources (including time and productivity). An example would be Vancouver housing (high demand, low supply).

As a result of scarcity, we need to make choices on what to spend the resources on and what to give up (trade-offs). The next best possible thing given up to do a choice is known as opportunity cost.

“Engineering challenges often pivot on the idea of scarce resources.”

Examples of scarce resources: :hammer:labor, :clock10:time, :moneybag:money, :factory:production capacity, :information_desk_person:expertise…

Problems Classification

It’s important to frame everything as “how do we best distribute scarce resources?”. Some decisions are obvious from a purely economic perspective, but sometimes non-economic factors that need to be accounted for - which will affect the difficulty of the problem.

Engineering economic analysis is suitable for intermediate problems that:

  1. Are important enough
  2. Requires organization and careful analysis
  3. Has economic aspects as deciding factor

Decision-Making Framework

  1. :question: Recognize the problem (critical).
    • Analyze existing data
    • Undesired outcomes
  2. :goal_net: Define the goal or objective (critical).
    • Based on expectations / desired outcomes
    • Can be either wide or narrow in scope
    • For simple and intermediate problems: goals are in economic terms
  3. :bar_chart: Assembly relevant data.
    • Accounting data / past information / flow of money / costs and benefits
  4. :thinking: Identify feasible alternatives.
    • Identify costs, advantages, and disadvantages for each alternative
  5. :100: Select criteria to determine the best alternative.
  6. :construction: Construct a model.
    • Mathematically connect the interrelationships of elements that could make up the decision
  7. :crystal_ball: Predict possible outcomes and consequences for each alternative.
  8. :ballot_box_with_check: Select the solution that produce the best result.
  9. :eyes: Audit the results.

Current Costs

Relatively simple economic problems which uses arithmetic models to determine a solution’s economic viability. These problems are addressed by comparing current costs and current benefits in short term because we assume that they don’t change. (In reality, the costs and benefits fluctuates and money lose value over time).

The current cost models are arithmetic and has information such as costs and revenues per unit. The model is also open to options or choices, parameters that alter the solution.

Example: mining cryptocurrency

You want to mine Ethereum and you need a beast GPU for that. Because of high-popularity of crypto-mining, The scarce RX 580 GPU, which has MSRP of $229 but now sells for $400.

You are debating you want to buy the GPU so you could get some easy cash over time. On average, you earn $2/day and consumes 400W of power. Where the cost of the electricity on average is $0.06/kWh.

You hope after a year you would earn some money. Perhaps you can sell RX 580 and get even more money.


Let’s say we run the miner for a year, that means we have gross income of $2×365=$730. Minus $400 of initial GPU purchase is $330.

The total cost due to power consumption is 24 hours × 0.4kW × $0.06/kWh × 365 days = $210.

The net income, thus, is $110.

On the surface this seem like a good idea (free money right?). For some, this is acceptable. But many non-economic factors have not been accounted for.

Ethics in Decision Making

Ethics distinguishes between right and wrong ethically in a decision. The most economical efficient solution is not always the most ethical one.

Even though we are mainly focusing on economic analysis. We must recognize ethical issues exist in the decision-making process. We must be transparent about how ethical issues affect decisions, and communicate potential consequences.

Influences

Sales tactics can influence ones decision due to a mix of business and pleasure activities (incentives). One would need to ask how to separate favor of influence from appropriate evaluation?.

Environment

Environment is an issue generally in large-scale projects. Even at smaller scale, it should be appropriately considered.

Safety and Cost

There is a cost to safety, the definition of how safe something is depends on the context of the project. There needs to be a balance of trade-offs between safety and cost.

Sometimes the cost of death or injuries due to unsafe product or process can be greater than the cost of safety used to prevent these incidents.

Emerging Global Issues

Globalization is relevant in ethical discussions. Multinational companies need to consider local standards or (more expensive) international standards. There exists cultural differences to be reconciled.