ECONOMIC: Classifying Problems and The Decision-Making Process.

Classifying Problems

Many problems are simple and thus easy to solve. Others are of intermediate difficulty and need considerable thought and/or calculation to properly evaluate.These intermediate problems tend to have a substantial economic component, hence are good candidates for economic analysis. Complex problems, on the other hand, often contain people elements, along with political and economic components. Economic analysis is still very important, but the best alternativemust be selected considering all criteria-not just economics.

The Decision-Making Process

Rational decision.making uses a logicalmethod of analysis to select the best alternativefrom
among the feasible alternatives.The following nine steps can be followed sequentially,but
decision makers often repeat some steps, undertake some simultaneously, and skip others
altogether.

1. Recognize the problem.
2. Define the goal or objective:What is the task?
3. Assemble relevant data:What are the facts? Are more data needed, and is it worth more than the cost to obtain it?
4. Identify feasible alternatives
5. Select the criterion for choosing the best alternative: possible criteria include political, economic, environmental, and humanitarian. The single criterion may be a composite of several different criteria.
6. Mathematically model the various interrelationships.
7. Predict the outcomes for each ilIiemative.
8. Choose the best alternative.
9. Audit the results.

Engineering decision making refers to solving substantial engineering problems in which economic aspects dominate and economic efficiency is the criterion for choosing from among possible alternatives. It is a particular case of the general decision-making process. Some of the unusual aspects of engineering decision making are as follows:

1. Cost-accounting systems,while an important source of cost data, contain allocations of indirect costs that may be inappropriate for use in economic analysis.

2. The various consequences--costs and benefits-of an alternativemay be of three types:

(a) Market consequences-there are established market prices
(b) Extra-market consequences-there are no dii-ectmarket prices, but prices can be assigned by indirect means
(c) Intangible consequences-valued by judgment, not by monetary prices

3. The economic criteria for judging alternatives can be reduced to three cases:

(a) For fixed input: maximize benefits or other outputs.
(b) For fixed output: minimize costs or other inputs.
(c) When neither input nor output is fixed:maximizethe differencebetween benefits and costs or, more simply stated, maximize profit.

The third case states the general rule from which both the first and second cases
may be derived.

4. To choose among the alternatives, the market consequences and extra-market consequences are organized into a cash flow diagram. We will see in Chapter 3 that engineering economic calculations can be used to compare differing cash flows.

These outcomes are compared against the selection criterion.From this comparison plus the consequences not included in themonetary analysis, the best alternative is selected.

5. An essential part of engineering decision making is the postaudit of results. This step helps to ensure that projected benefits are obtained and to encourage realistic estimates in analyses.

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