Economy is what keeps a nation on its feet.
Engineering Economy
 deals with the concepts and techniques
of analysis useful in evaluating the
worth of systems, products, and
services in relation to their costs
 analysis and evaluation of the factors
that will affect the economic success of
engineering projects to the end that
recommendation can be made which
will ensure the best use of capital (Sta.
Maria)
 Which engineering projects are
worthwhile?
 Which engineering projects should
have a higher priority?
 How should the engineering project
be designed?
Consumer Goods And Services
- are those products or services that are
directly used by people to satisfy their wants.
Producer Goods And Services
- are used to produce consumer goods and
services or other producer goods.
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
-is the opposite of perfect competition.
-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
-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.
Necessities
-are those products or services that are
required to support human life and activities
that will be purchased in somewhat 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.
Demand
- is the quantity of a certain commodity that
is bought at a certain price at a given place
and time.
Supply
-is the quantity of a certain commodity that
is offered for sale at a certain price at a
given place and time.
Law of Supply (Producer’s view)
“The quantity of a good supplied rises as the
market price rises and falls as the price falls.
“
Law Of Demand
“The quantity of a good demanded falls as
the price rises, and vice versa.”
Elastic demand
– occurs when a decrease in selling price
results in a greater than proportionate
increase in sales
→luxuries
Inelastic demand
– occurs when a decrease in selling price
produces a less than proportionate increase
in sales
→necessities
Supply and Demand Relationship
“Under conditions of perfect competition, the
price at which a given product will be
supplied and purchased is the price that will
result in the supply and the demand being
equal.
“When supply and demand are equal, the
economy is said to be at equilibrium.”
Disequilibrium
-occurs whenever the price or quantity is not
equal
1. Excess Supply
-If the price is set too high, excess supply
will be created within the economy and
there will be allocative inefficiency.
2. Excess Demand
-Excess demand is created when price is
set below the equilibrium price. Because the
price is so low, too many consumers want
the good while producers are not making
enough of it.
Utility – the capacity of a commodity to
satisfy human wants
Law of Diminishing Utility
“An increase in the quantity of any good
consumed or acquired by an individual will
decrease the amount of satisfaction derived
from that good”
Direct Cost
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.”
Indirect Cost
Fixed Costs
The
costs
of
providing
a
company’s
basic
operating capacity
Variable Costs
Costs
that
vary
depending on the
level of production or
sales
Activity cost per unit
basis
Costs that represent
the differences in
total costs, which
result from selecting
one
alternative
instead of other
The potential benefit
that is given up as
you
seek
an
alternative course of
action
-Cost
that
has
already
been
incurred by past
actions.
-An
investment
already incurred that
can't be recovered
Cost required to get
the project started
Dependent on the
level of activity of the
desired output
Added costs that
result
from
increasing rates of
outputs, usually by
single unit
Average Unit Cost
Differential
(Incremental) Costs
Opportunity Costs
Sunk Costs
First Cost
Operation
Maintenance
Marginal Costs
and
Unit Marginal
Contribution
Difference between
the unit sales price
and the unit variable
cost
Those that can be
rationally measured
and allocated to a
specific output or
activity
Cannot be rationally
measured
Selections of Present Economy
- analysis of problems for manufacturing a
product or rendering a service based on
present or immediate cost
- effect of time is negligible
- interest is not a factor
• Selection of Material
• Selection of Method
• Selection of Design
• Site Selection
• Comparison of Proficiency of workers
• Economy of Tool and Equipment
Maintenance • Economy of Number of
worker
Interest
- The amount of money paid for the use of
borrowed capital or the income produced by
money which has been loaned
Simple Interest
- calculated using the principal only,
ignoring any interest that have been
accrued in preceding periods.
-
a. Ordinary Simple Interest – computed on
the basis of 12 months of 30 days a year

1 interest period = 360 days
b. Exact Simple Interest – 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 day
Cash Flow Diagram
-Graphical representation of cash flows
drawn in a time scale
Compound Interest
- In calculations of compound interest, the
interest for an interest period is calculated
on the principal plus total amount of interest
accumulated in previous periods.
- means "interest on top of interest"
Discount
-The difference between present worth
(cash received) and the future worth (face
value of principal).
- Interest is paid in advance.
Rate of Discount
- The discount on one unit of principal for
one unit of time.
Inflation
- The increase in prices for goods and
services from one year to another, reducing
the purchasing power of money.
Rate of Interest:
a. Nominal rate of interest
- specifies the rate of interest and the
number of interest periods in one year
b. Effective rate of interest
– the actual or exact rate of interest on the
principal during one year
Concept of Equivalence or Equation Of
Value
- obtained by setting the sum of the values
on a certain comparison or focal date of one
set of obligations equal to the sum of the
values on the same date of another set of
obligations
Discrete compounding
- the interest is compounded at the end of
each finite-length period, such as a month, a
quarter, or a year.
Continuous compounding
- it is assumed that cash payments occur
once a year, but the compounding is
continuous throughout the year.
F=Pern
Depreciation
- a reduction in the value of an asset
with the passage of time, due in
particular to wear and tear.
Salvage Value
- the estimated book value of an asset
after depreciation is complete, based on
what a company expects to receive in
exchange for the asset at the end of its
useful life
Rate of return
-a measure of the effectiveness of an
investment of capital
Payback period
-is commonly defined as the length of
time required to recover the first costs of
an investment from the net cash flow
produced by that investment for an
interest rate of zero.