1. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Economic Analysis in the Service Sector Lecture No. 52 Chapter 16 Contemporary Engineering Economics Copyright © 2016

2. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Chapter Opening Story  Motor vehicle crashes cost $871 billion in economic loss and social harm.  To reduce road accidents caused by mechanical defects, many states implement various car inspection program.  The State of Pennsylvania’s $25 million motor vehicle inspection program would reduce the fatal crashes by 127–169 per year.  Is it worth undertaking?

3. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Contribution of the Service Sector to the U.S. Gross Domestic Product (GDP)

4. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved What Is Service Sector?  Commercial Transportation  Logistics and Distribution  Healthcare Delivery  Financial Engineering  Electronic Markets and Auctions  After-Sale Equipment Monitoring, Maintenance and Repair  Retailing, Hotel, and Restaurant  Hospitality and Entertainment  Customer Call/Contact Centers

5. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Source: National Science Foundation, 2002 Some Unique Characteristics of Service Sector

6. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 1 o Services are generally intangible. They have sometimes been defined as anything of economic value that cannot be held or touched.

7. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 2 o It is usually impossible to build inventories of services. o Either the demand for the service must be backlogged or enough resources need to be provided to meet an acceptable fraction of the demand as it arises.

8. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 3 o Services are more dynamic and demand- responsive than manufactured products. o This means variability and risk are more central issues in service industries.

9. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 4 o Many services (examples are medical treatment and equipment repair) require a diagnostic step to design the service (co- production) as part of its delivery.

10. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 5 o Service products are usually less standardized and less subject to design specifications than manufactured goods because the outputs are tailored to customer needs as they are delivered.

11. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 6 o The dimensions of service quality are more subtle and subjective than with physical products. o Not only are the parameters of services more difficult to express, but customer perceptions play a much greater role in deciding what is satisfactory or valuable.

12. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 7 o Most service operations are more labor- intensive than manufacturing industries.

13. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 8 o Compared to goods industries, a much greater fraction of the service economy is operated by governments and institutions.

14. Contemporary Engineering Economics, 6 th edition Park Copyright © 2016 by Pearson Education, Inc. All Rights Reserved Property 9 o Information technology is central in service industries. Often it is the only significant equipment available to multiply human output.