Engineering Economy Cont…
Engineering economy is applied
microeconomics, where the fundamental
question is :
Is it in the best interest of the
enterprise to invest its limited
resources in a proposed technical
endeavor, or would the same
investment produce a higher return
Origins of Engineering Economy
General topics in engineering
The Relevance of Engineering
Economy to Engineering in General
Science is defined as:
a department of systematized knowledge as
an object of study; knowledge or a system of
knowledge covering general truths or the
operation of general laws esp. as obtained
and tested through scientific method
The Relevance of Engineering Economy to
Engineering in General Cont…
The Accreditation Board of Engineering and Technology (ABET) is the recognized
authority for accrediting engineering and technology degree programs at colleges
and universities in the United States. ABET defines engineering as
… the profession in which a knowledge of the
mathematical and natural sciences gained by
study, experience, and practice is applied with
judgment to develop ways to utilize,
economically, the materials and forces of nature
for the benefit of mankind
Engineering & Economics
Engineering = Science + Economics
Software Engineering = Computer Science + Software Economics
Fundamental Principles in Engineering
Rupee now is worth more than rupee at a later time.
All that counts is the differences among alternatives.
Marginal revenue must exceed marginal cost.
Additional risk is not taken without the expected
Principles of Engineering Economy
Develop the alternatives
Focus on the differences
differences in „expected future outcomes‟
among the alternatives are relevant to
their comparison, and should be
considered in the decision.
Use a consistent viewpoint
The future outcomes of the alternatives,
economic and other, should be
consistently developed from a defined
Use a common unit of measure
Consider all relevant criteria
Selection of a preferred alternative
(decision making) requires the use of a
criterion (or several criteria ).
The decision process should consider the
outcomes enumerated in the monetary
unit and those expressed in some other
unit of measurement or made explicit in a
Systematic Decision Process
5 steps of decision making
Define the opportunity
Identify and analyze alternative courses
Estimate their effects on the problem or
opportunity choose a preferred course of
To implement the choice
Evaluate the results and proceed with any
follow up if necessary
Make uncertainty explicit
Uncertainty is inherent in projecting
(or estimating) the future outcomes of
the alternatives and should be recognized
in their analysis and comparison.
Revisit your decisions
Improved decision making results from an
adaptive process; to the extent
practicable, the initial projected outcomes
of the selected alternative should be
subsequently compared with actual
Why should we software folk care about
The answer lies in our chances of survival
in the capitalist environment. And that, in
turn, depends on how high our shop sets
the bar for its notion of software success.
Definitions of “success” in shops
1. Success:We’re still here at the end of the project.
2. Success:We’re still here at the end of the project and
we’ve written a bunch of code.
3. Success: We’re still here at the end of the project and
we we’ve written a bunch of code that runs.
4. Success: We’re still here at the end of the project and
we have a bunch of code (from various sources) that
does something useful.
5. Success: We’re still here at the end of the project and
we have implemented cost effective solutions to real
business problems and cost-effective exploitations
of real business opportunities, involving a
combination of manual and automated systems.
Software economics has often been
misconceived as the means of estimating the
cost of programming projects. But economics is
primarily a science of choice, and software
economics should provide methods and models
for analyzing the choices that software projects
In any software project there is always a balance
between short-term and long-term concerns . . .
economic methods can help us make
Software professionals are faced
with choices every day….
“Should we even do the Alpha project?”,
“How much testing is enough?”
“Should the Omega project use the Rational Unified Process
[Kruchten00] or would eXtreme Programming or one of the
other Agile methods be better?”,
“What algorithm should we use in module Gamma?”,
“Should the data structure be a linked list or an array?”, and
Apparently safe choices can have a noticeable effect on the
At a minimum, a poor choice on something as seemingly
insignificant as an algorithm or data structure could lead to
inadequate performance, low maintainability, or defects and
lead to unnecessary downstream maintenance.