Erdogan narrowly won a referendum a year ago to replace Turkey's parliamentary democracy with a system featuring an all-powerful presidency, and followed that with a hard-fought election victory last month to the newly strengthened post.
Erdogan will take the oath of office in parliament at 4 pm (1300 GMT), before attending a ceremony two hours later at the huge presidential palace he has constructed in the capital.
Twenty-two heads of state and 28 prime ministers and speakers of parliament were present at the ceremony.
Simsek, a former Merill Lynch economist who had spent much of the previous year trying to reassure markets after sometimes provocative comments by Erdogan, appeared to show no bitterness over his departure.
"We are leaving behind the system that has in the past cost our country a heavy price in political and economic chaos", he said.
Empowered by a popular mandate on the back of a convincing electoral victory, Erdoğan will have to address urgent questions in Turkey such as the fate of more than 3 million Syrian refugees living in the country, the progress of the war across the border, a faltering economy and a weakening currency.
Erdogan pledged to "reinforce the social state" in the new era and "leave behind the days that people were externalized and alienated for whatever reason". Under the new system, Erdogan receives more power, with the role of prime minister now abolished.
There are 16 ministers in Erdogan's streamlined new cabinet, which Erdogan has said will be more efficient and act faster. "It is a sign that Erdogan will control economic policy even more", Guillaume Tresca, a senior strategist at French bank Credit Agricole, told Reuters.
Multiple ministries will be merged.
"In order to build confidence among both foreign and domestic investors, there must be a narrative which is not divorced from the market reality", said Seda Yalcinkaya, an analyst at brokerage Integral.
Investors were waiting to see whether cabinet appointees would include individuals seen as market-friendly, and particularly whether Mehmet Simsek, now deputy prime minister, would continue to oversee the economy. Mevlut Cavusoglu has retained the post of Foreign Minister, Suleyman Soylu - the post of Interior Minister, Abdulhamit Gul - the post of Minister of Justice. Armed forces chief of staff Hulusi Akar was named defence minister.
"We are embarking on this road by using this opportunity as best we can for a strong parliament, strong government and strong Turkey", he said.
Presidents of Bulgaria, Georgia, Macedonia, Moldova, Bosnia and Herzegovina, Serbia, Kosovo, Pakistan, Kyrgyzstan, Venezuela, Turkish Republic of Northern Cyprus and Emir of Qatar were also in attendance.
He will then head to more challenging encounters at a North Atlantic Treaty Organisation summit in Brussels where he will meet with United States counterpart Donald Trump.