Lesson 1: Basic Economic Principles; Engineering Economy and the Design Process; Cost Concepts for

Decision Making
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Assignment: (Provide a notebook for this subject for your assignments)
1.
2.

History of Money in the Philippines

What are the different forms and names of currency (banknotes and coins) that were used in the
Philippines before the use of Philippine Peso?
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Introduction:
Basic Economic principles
Economics

is one of the social sciences which consist of that body of knowledge dealing with people and
their assets or resources.
the sum total of knowledge which treats of the creation and utilization of goods and services
for the satisfaction of human wants.

Engineering Economy is defined as that branch of economics which involves the application of definite laws
of economics, theories of investment and business practices to engineering problems
involving cost.
May also be considered to mean the study of economic problems with the concept of obtaining
the maximum benefit at the least cost.
Also involves the study of cost features and other financial data and their applications in the
field of engineering as bases for decision.
Important Applications of Engineering Economy
1.
2.
3.
4.
5.

Seeking of new objectives for the applications of engineering

Discovering of factors limiting the success of a venture or enterprise
Analysis of possible investment of capital
Comparison of alternatives as a basis for decision
Determination of bases for decision

Principles of Engineering Economy

1.
2.
3.
4.
5.
6.
7.

Develop the alternatives

Focus on the differences
Use a consistent viewpoint
Use a common unit of measure
Consider all relevant criteria
Make uncertainty explicit
Revisit your decisions

Three Basic Steps for the Complete Analysis of a Proposed Project

1.

Economy analysis considers all factors affecting the economy of the project which can be reduced to
specific monetary values. It determines:
the initial cost of the project
cost for operation and maintenance

Handout #1 Engineering Economy

Engr. Maria Senen L. Dimaano-Bongulto
1 st Sem, A.Y. 2016 2017

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the needed working capital

the probable income the project will generate when operational
the rate of return of investment, and all other cost factors

2.

Financial analysis determination of the methods and sources of financing the project, either through
equity capital or borrowed capital, or a combination of both

3.

Intangible analysis - determines all the aspects of the project which cannot be reduced to monetary
values and considers the uncertainty and the risk inherent in the project. Its scope includes the socalled judgment factor whose analysis depends upon the judgment of responsible persons involve in
the project.

Two basic types of factors that are involved in economic studies:

1.
2.

Tangible factors those which can be expressed in terms of monetary values

Intangible factors are those which are difficult or impossible to express definitely in terms of
monetary values, Also called as irreducible factors.

Engineering Economy and the Design Process

An engineering economy study is accomplished using a structured procedure and mathematical modelling
techniques. The economic results are then used in a decision situation that involves two or more alternatives
and normally includes other engineering knowledge and input.
General Relationship between the engineering economic analysis procedure and the engineering
design process
Step in Engineering Economic Analysis Procedure
Activity in Engineering Design Process
1. Problem
recognition,
definition,
and 1. Problem / need definition.
evaluation
2. Problem / need formulation and evaluation
2. Development of the feasible alternatives.
3. Synthesis of possible solutions (alternatives).
3. Development of the outcomes and cash flows
for each alternative.
4. Analysis, optimization, and evaluation.
4. Selection of a criterion (or criteria).
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
5. Specification of preferred alternative
7. Performance monitoring and post-evaluation 6. Communication
of results.

COST CONCEPTS FOR DECISION MAKING

Basic cost terminology and concepts that are used in economics

Competition

Perfect competition occurs when a certain product id offered for sale by many vendors or suppliers, and there
is no restriction against other vendors from entering the market. Buyers are free to buy from any vendor, and
the vendors, likewise are free to sell to anyone.

Monopoly

Handout #1 Engineering Economy

Engr. Maria Senen L. Dimaano-Bongulto
1 st Sem, A.Y. 2016 2017

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Monopoly is the opposite of perfect competition. This occurs when a unique product or service is available only
from a single supplier and entry of all other possible suppliers is prevented.
Under this condition, the single vendor can control the supply and the price of the product or
service.

Oligopoly

Price regulates production. If prices go up, production will increase. If prices decrease, production will also
decrease or cease.

Market - Is defined to be a placed where sellers and buyers come together.

a.
b.
c.

Local market limited locality where certain goods such as those which are perishable are sold
National market certain goods are sold all over the country
World market goods are exported to other countries

Two kinds of goods

1.
2.

Consumer goods are those that are consumed or used directly by people, or are things and services
which serve to satisfy human needs
Producer goods are those which produce goods and services for human consumption. These are
instrumental in producing something or furnishing service for people.
Demand is the quantity of a certain commodity that is bought at a certain price at a given place and
time. Desire without actual purchase of the commodity does not constitute demand.
The demand for a commodity varies inversely as the price of the commodity, though not proportionately.
Elasticity of Demand
a.

Elastic demand occurs when a decrease in selling price will cause a greater than proportionate
increase in the volume of sales.
Example:
Goods which are considered as luxuries because a small decrease in cost will usually
result in a big increase of sales
b.

Inelastic demand occurs when a decrease of selling price will cause a less than proportionate
increase in sales.
Example:
Goods that are considered as necessities because even a big decrease in selling price will
not cause a big increase in the volume of sales.
c.

Unitary Elasticity of demand occurs when the mathematical product of price and volume of sales
remains constant regardless of any change in price.
PV = C
Where: P = price of the product, V = volume of sales, and C = a constant

Utility is defined to be the capacity of a commodity to satisfy human want. (importance)

If the utility of a certain good to a certain individual is great, his demand for that good will be great.
However, if a certain good has very small utility, the demand will likewise be small.
The demand for a certain good varies directly as the utility

Handout #1 Engineering Economy

Engr. Maria Senen L. Dimaano-Bongulto
1 st Sem, A.Y. 2016 2017

-3-

 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. The utility of a commodity decreases with an increase in the quantity
available.
Example:
If a man has only one car, the utility of that car to him would indeed be great. However, a second similar car
would not have as much utility as the first.
To increase the utility of any commodity, it should be different from other similar commodities.
Marginal Utility
The marginal utility of a commodity is the utility of the last unit of the same commodity which is consumed or
acquired.
Marginal unit the last unit of similar commodities consumed or acquired.

Supply is the quantity of a certain commodity that is offered for sale at a certain price at a given place and
time
The supply of a commodity varies directly as the price of the commodity, though not proportionally.

Law of Supply and Demand

When free competition exists, the price of a product will be that value where supply is equal to the
demand.
Law of Diminishing Returns
When one of the factors of production is fixed in quantity or is difficult to increase, increasing the other factors
of production will result in a less than proportionate increase in output.
Example:
Increasing the span of bridges will reduce the cost of abutments and piers, but will defini tely increase
the cost of the superstructure
Increasing the span between towers of a transmission line will decrease the cost of the towers, but will
increase the cost of the transmission wires or cables, since larger wires are needed for longer spans
MARGINAL REVENUE and MARGINAL COST
Marginal revenue is that amount received from the sale of an additional unit of a product.
Marginal cost is the additional cost of producing one more unit.
When a free competition exists, the number of units produced will give the maximum profit is that
for which the marginal revenue and marginal cost is equal.

Handout #1 Engineering Economy

Engr. Maria Senen L. Dimaano-Bongulto
1 st Sem, A.Y. 2016 2017

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PHYSICAL and ECONOMIC EFFICIENCY

Unless the economic or financial efficiency exceeds 100%, the investment of capital, from a strictly financial
viewpoint is not recommended.
Effectiveness of the utilization

a.

b.

c.

Rate of Return is the most universally accepted measure of financial efficiency

d.

Payout Period is another measure of economic efficiency. This ratio determines the number of years necessary
to recover the amount of the invested capital from the earnings of the investment.
e.

Handout #1 Engineering Economy

Engr. Maria Senen L. Dimaano-Bongulto
1 st Sem, A.Y. 2016 2017

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