The Economic Environment
Engineering economy is the analysis
and evaluation of the factors that will
affect the economic success of
engineering projects to the end that a
recommendation can be made which will
insure that best use of capital.
Consumer and Producer Goods
and Services
Consumer goods and services are
those products or services that are
directly used by people to satisfy their
wants/needs
Producer goods and services are used
to produce consumer goods and services
or other producers goods.
Necessities and Luxuries
Necessities are those products or services
that are required to support human life and
activities, that will be purchased in somewhat
the same quantity even though the price varies
considerably
Luxuries are those products or services that
are desired by humans and will be purchased if
money is available after the required necessities
have been obtained.
Necessities and Luxuries
Demand
Luxuries
Necessities
Price
Demand
Demand is the quantity of certain
commodity that is bought at a certain
price at a given place and time.
Elastic Demand
Elastic demand occurs when a
decrease in selling price result in a
greater than proportionate increase
in sales.
Inelastic Demand
Inelastic demand occurs when a
decrease in selling price result in a
less than proportionate increase in
sales.
Unitary Elasticity Demand
Unitary elastic demand occurs
when a when a mathematical
product of volume and price is
constant.
Demand
General Price-demand
Relationship
Price
Perfect Competition
Perfect Competition occurs in a
situation where a commodity or service is
supplied by a number of vendors and
there is nothing to prevent additional
vendors entering the market
Monopoly
Monopoly is the opposite of perfect
competition. A perfect monopoly exists
when a unique product or service is
available from a single vendor and that
vendor can prevent the entry of all others
into the market
Oligopoly
Oligopoly exists when there are so few
suppliers of a product or service that
action by one will almost inevitably result
in similar action by the others
The Law of Supply and Demand
Supply is the quantity of a certain
commodity that is offered for sale at a
certain price at a given place and time.
Supply Demand
if the price increases:
If the price decreases:
The Law of Diminishing Returns
When the use of one of the factors of
production is limited, either in increasing cost
or by absolute quantity, a point will be reached
beyond which an increase in the variable
factors will result in a less than proportionate
increase in output
Interest and Money-Time
Relationship
Simple Interest – only the principal earns
interest
I = Pni
F=P+I
F = P + Pni
F = P(I+ni)
Where:
I = interest
i = rate of interest per
interest period
n = # of interest period
P = principal or present
worth
F = accumulated amount
or future worth
a) Ordinary simple interest is compound
is computed on the basis of 12
months of 30 days each or 360 days a
year.
1 interest period = 360 days
b) Exact simple interest is based on the
exact number of days in a year, 365
days for an ordinary year and 366
days for a leap year.
1 interest period = 365 or 366 days
Ex 1. Determine the ordinary simple interest on P700 for 8
months and 15 days if the rate of interest is 15%
Given:
P = P700
n = 8 months
i = 15%
Solution:
Unknown:
I=?
Formula:
I = Pni
Answer:
I = P74.38
Ex 2. Determine the exact simple interest on P500 for the
period from January 10 to October 28, 1996 at 16%
Solution:
Given:
P = P500
n = 10 months (ex Jan 10
& in Oct 28)
i = 16%
Unknown:
ESI = ?
Formula:
ESI = Pni
Answer:
ESI = P63.83
Months
Jan = 21 (excluding Jan 10)
Feb = 29
Mar = 31
Apr = 30
May = 31
Jun = 30
Jul = 31
Aug = 31
Sep = 30
Oct = 28 (including Oct 28)
Total = 292 days
Ex 3. What will be the future worth of money after 14 months,
if a sum of P10,000 is invested today at a simple interest
rate 12%
Given:
P = P10,000
n = 14 months
i = 12%
Solution:
Unknown:
F=?
Formula:
F = P(I+ni)
Answer:
F = P11,400.00
I = Pni
F=P+I
F = P + Pni
F = P(I+ni)
Cash-Flow Diagrams – is simply a
graphical representation of cash flows
drawn on a time scale. Cash-flow for
economic analysis problem is analogous
to that free body diagram for mechanics
problems
Receipt (positive cash flow or cash inflow)
Disbursement (negative cash flow or cash
outflow
Ex. 4. A loan of P100 at a simple interest of
10% will become P150 after 5 years.
P150
1
2
P100
P100
4
5
3
Cash flow diagram on the viewpoint of the lender
Cash flow diagram on the viewpoint of the borrower
1
2
3
4
5
P150