MIRPUR UNIVERSITY OF SCIENCE AND TECHNOLOGY
DEPARMENT OF SOFTWARE ENGINEERING
SE-361 Software Engineering Economics 1
Engineering Economic Decisions
(Lecture # 02)
CLO PLO
1 1
SE-361 Software Engineering Economics 2
Types of Strategic Engineering Economic Decisions
in Service Sector
Commercial Transportation
Logistics and Distribution
Healthcare Industry
Electronic Markets and Auctions
Financial Engineering
Retails
Hospitality and Entertainment
Customer Service and Maintenance
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Fundamental Principles of Engineering Economics
• Principle 1: A nearby dollar is worth more than a distant
dollar
• Principle 2: All it counts is the differences among
alternatives
• Principle 3: Marginal revenue must exceed marginal cost
• Principle 4: Additional risk is not taken without the
expected additional return
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Principle 1: A nearby dollar is worth more than a
distant dollar
Today 6-month later
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Principle 2: All it counts is the differences among
alternatives
Option Monthly Monthly Cash Monthly Salvage
Fuel Maintena outlay at payment Value at
Cost nce signing end of
year 3
Buy $960 $550 $6,500 $350 $9,000
Lease $960 $550 $2,400 $550 0
Irrelevant items in decision making
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Principle 3: Marginal revenue must exceed marginal
cost
Marginal
cost
Manufacturing cost 1 unit
Marginal
Sales revenue 1 unit revenue
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Principle 4: Additional risk is not taken without the
expected additional return
Investment Class Potential Expected
Risk Return
Savings account Low/None 1.5%
(cash)
Bond (debt) Moderate 4.8%
Stock (equity) High 11.5%
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Summary
• The term engineering economic decision refers to all investment
decisions relating to engineering projects.
• The five main types of engineering economic decisions are (1)
service improvement, (2) equipment and process selection, (3)
equipment replacement, (4) new product and product
expansion, and (5) cost reduction.
• The factors of time and uncertainty are the defining aspects of
any investment project.
SE-361 Software Engineering Economics 9
What Is Economics and Why Is it Important to Us?
• Economics is the science of reasoned choice, at
least as it applies to engineering.
Economy. . .
. . . The word Economy comes
from a Greek word for “one who
manages a household.”
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A household and an economy
face many decisions:
Who will work?
What goods and how many of them should
be produced?
What resources should be used in
production?
At what price should the goods be sold?
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Society and Scarce Resources:
The management of society’s
resources is important because
resources are scarce.
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Scarcity . . .
. . . means that society has limited
resources and therefore cannot
produce all the goods and services
people wish to have.
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Economics
Economics is the study of how
society manages its scarce
resources.
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What is Economics?
Many definitions:
It is the branch of social science that deals with the
production , distribution and consumption of goods and
services and their management.
It is the study of choice and decision-making in a world
with limited resources.
It is the study of how individuals, businesses and
governments use their limited resources to satisfy
unlimited wants.
It is the study of the production and distribution of
wealth.
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Words that have economy/economics in them:
Macroeconomics: that area of economics that focuses on analysis of broad trends in a
country's economy, such as inflation, unemployment and industrial production, tax rates,
interest rates, and foreign and trade policy.
OR
Macroeconomics is the study of how people make decisions in resource-limited situations on a
national or global scale.
Microeconomics: The branch of economics concerned with the decisions made by
individuals, households, and firms and how these decisions interact to form the prices of
goods and services and the factors of production.
OR
Microeconomics is the study of how people make decisions in resource-limited situations on a
more personal scale
Engineering economy/economics: the systematic evaluation of the economic
merits of proposed solutions
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Economics and Software Engineering
• If we look at the discipline of software engineering we see that
the microeconomics branch of economics deals more with the
types of decisions we need to make as software engineers or
managers.
• Clearly, we deal with limited resources
• There is never enough time or money to cover all the good
features we would like to put into our software products.
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Economics and Software Engineering
Throughout the software life cycle, there are many
decision situations involving limited resources in which
software engineering economics techniques provide
useful assistance.
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Economics and Software Engineering
Feasibility Phase. How much should we invest in information
system analyses (user questionnaires and interviews, current-
system analysis, workload etc. ) in order to meet and concept of
operation for the system we plan to implement?
Plans and Requirements Phase. How thoroughly should we
specify requirements? How much should we invest in
requirements validation activities before proceeding to design
and develop a software system?
Product Design Phase. Should we organize the software to
make it possible to use a complex piece of existing software that
generally but not completely meets our requirements?
SE-361 Software Engineering Economics 19
Economics and Software Engineering
Programming Phase. Given a choice between three data storage
and retrieval schemes that are primarily execution-time efficient,
storage efficient, and easy to modify, respectively, which of these
should we choose to implement?
Integration and Test Phase. How much testing and formal
verification should we perform on a product before releasing it to
users?
Maintenance Phase. Given an extensive list of suggested product
improvements, which ones should we implement first?
Phase-out. Given an aging, hard-to-modify software product,
should we replace it with a new product, restructure it, or leave it
alone?
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Economists study. . .
How people make decisions.
How people interact with each other.
The forces and trends that affect the economy as a whole.
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THANKS
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