Week 1 Supply and Demand

Engineering Economy  Supply – refers to how many of a certain good or

services are available for people to purchase.
 uses mathematical formulas to account for the time
value of money  Demand – means how many people wish to buy that
and to balance current and future revenues and costs. good or service.

 involves formulating, estimating, and evaluating the

expected
economic outcomes of alternatives designed to LAW OF SUPPLY AND DEMAND
accomplish a defined purpose. Mathematical
 Under conditions of perfect competition, the price at
techniques simplify the economic evaluation of
which a given product will be supplied and purchased
alternatives.
is the price that will result in the supply and demand
being equal.

Economics

 is the science that deals with the production, Demand

allocation and use of goods and services.
 it refers to the people’s willingness to buy a product
The two major subdivisions of economics are: or service.

a. Macroeconomics - is the study of the entire system of Demand Curve – is the plot or graph of the quantity
economics. demanded versus the price.
b. Microeconomics - is the study of how the systems affect
Demand Schedule – is the schedule or table listing of the
one business or parts of the economic system.
quantity demanded with the corresponding price.

Types of Demand
Necessities and Luxuries 1. Elastic Demand – exists when there is a greater
 Necessities – are products or services that are change in quantity demanded as a response to a
required to support human and activities that will be change in price.
purchased in somewhat the same quantity even 2. Inelastic Demand – exists when there is a lesser
though the prices vary considerably. change in quantity demanded as a response to a
 Luxuries – are products and services that are desired change in price.
by humans and will be purchased if money is 3. Unitary Demand – exists when there is an equal
available after the required necessities have been change in price and quantity demanded (increase or
obtained. decrease).

Consumer and Producer Goods and Services Factors that Influence Demand are:
 Goods – is defined as anything that anyone wants or 1. Income
needs.
2. Population
 Services – would be the performance of any duties or
work for another; helpful or professional activity. 3. Taste and preference

 Marketing – refers to the distribution of goods and 4. Price Expectation

services.
5. Price of Related Goods
 Marketing a Product – refers to the advertising, and
Supply
other efforts to promote a products sale.
it is the willingness of a producer to manufacture
goods.
DIFFERENT TYPES OF GOODS
Supply Curve
1. Consumer Goods – are those such as food and
is the plot or graph of the quantity supplied versus the
clothing that satisfy human wants and needs.
price.
2. Producer Goods – are those such as raw materials
Demand Schedule
and tools, used to make consumer goods.
is the schedule or table listing of the quantity
3. Capital Goods – are the machinery, used in the
supplied with the corresponding price.
production of commoditiesin producer goods.
Factors that Influence Supply are: Week 2

1. Price of Goods INTEREST & MONEY – TIME RELATIONSHIPS

2. Cost of Production
3. Availability of Resources Interest
4. Number of Producer and Sellers  is the return on capital or cost of using capital. It is the
5. Technological Advancement amount of money paid for the use of borrowed capital or
6. Taxes the income produced by money, which has been loaned.
7. Subsidies

RELATIONSHIP OF SUPPLY AND DEMAND Simple Interest

 Shortage – the supply is less than the demand.  is calculated using the principal only, ignoring any interest
that had been accrued in preceding period.
 Surplus – the supply exceeds the demand.
Types of Simple Interest
 Equilibrium Point – the supply is equal to the
demand 1) Ordinary Simple Interest

simple interest in which it is assumed that each

month contains 30 days and consequently each year has 360
MARKET STRUCTURE days.
 Market – is the place where the vendors and buyers meet 1 month = 30 days
to transact.
1 year = 360 days (banker’s year)
 Perfect Competition – occurs in a situation where a
commodity or service is supplied by several vendor and 2) Exact Simple Interest
there is nothing to prevent additional vendors entering the
simple interest in which the exact number of days per
market.
month is used.
 Perfect Monopoly – exist when a unique product or
1 ordinary year = 365 days
services is available from a single vendor and that the
vendor can prevent the entry of all others into the market. 1 leap year = 366 days
 Oligopoly – exist 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.  Interest paid on borrowed funds (a loan) is determined
using the original amount, also called the principal

Interest = amount owed now – principal

Performing an Engineering Economy Study
 When interest paid over a specific time unit is expressed
In order to use economic analysis techniques, it's necessary to as a percentage of the principal, the result is called the
grasp the fundamental language and fundamental ideas that interest rate.
kind the inspiration for engineering economy studies

Alternatives
Rates of Interest
is an independent answer for a given circumstance.
(Considerations: first cost, helpful life, working cost, salvage  it is the cost of borrowing money.
value and financing cost)
Nominal Rate of Interest
Cash Flows.
 it specifies the rate of interest and a number of
these assessments are really the core of a designing interest periods in one year.
monetary investigation
Effective Rate of Interest
Alternative Selection
 it is the actual or exact rate of interest on the principal
identifying or selecting of the best fit alternative or choice during one year.

Evaluation Criteria Compound Interest

measures used to determine the best option to achieve the the interest for an interest period is calculate on the
target, option with the least generally speaking expense or principal plus total amount of interest accumulated in the
most elevated by and large overall gain is chosen previous period. Compound interest means “the interest on top
of interest.”
Intangible Factors

when the options viable are difficult to recognize

monetarily, impalpable elements may tilt the choice toward
one of the other options.
 [Link] interest rate of 10% compounded semi-annually

[Link] interest rate of 6% compounded monthly

Economic Equivalence

 is a combination of interest rate and time value of 1) Which of the following 1-year investments has the highest
money to determine the different amounts of money rate of return?
at different points in time that are equal in economic
value. (a) Php 12,500 that yields Php 1125 in interest,

Example: (b) Php 56,000 that yields Php 6160 in interest, or

Amount accrued = 100 + 100(0.06) = 100(1 + 0.06) = P106 (c) Php 95,000 that yields Php 7600 in interest .

 If someone offered you a gift of Php100 today or 2)Mary borrowed Php12,354 to buy a car. The loan was for 3
Php106 one year from today, it would make no year at an annual interest rate of 7.5%. What is the amount of
difference which offer you accepted from an interest Mary paid? What is the maturity value of the loan?
economic perspective. 3) Nancy borrowed Php4,325 to buy furniture for her office.
 In either case you have Php106 one year from today. The loan was for 6 months at an annual interest rate of 9%.
What is the amount of interest Nancy paid? What is the
 However, the two sums of money are equivalent to maturity value of the loan?
each other only when the interest rate is 6% per year.
4) Construct a cash flow diagram that represents the amount of
 Php100 now is equivalent to 100/1.06 = Php94.34 money that will be accumulated in 15 years from an
one year ago at an interest rate of 6% per year. investment of Php40,000 now at an interest rate of 8% per
year.
 Php94.34 last year, Php100 now, and Php106 one
year from now are equivalent at an interest rate of 6%
per year.
5) Because market interest rates were near all-time lows at 4%
 The fact that these sums are equivalent can be per year, a company decided to call (i.e., pay off ) the high-
verified by computing the two interest rates for 1- interest bonds that it issued 3 years ago. If the interest rate on
year interest periods. the bonds was 9% per year, how much does the company have
to pay the bond holders? The face value (principal) of the
6/100 x 100% = 6% per year bonds is Php6,000,000.
5.66/94.34 x 100% = 6% per year

1) Which is more advisable to invest Php5,000 for five (5)

years, to bank A that offers 5% compounded continuously or
1) An employee borrows P10,000 on May 1 and must repay a
to bank B that offers 10% simple interest?
total of P10,700 exactly 1 year later. Determine the interest
amount and the interest rate paid. 2) A man bought a lot worth Php1,000,000.00 if paid in cash.
On the installment basis, he paid a downpayment of
2) You plan to borrow P20,000 from a bank for 1 year at 9%
Php200,00.00, Php300,000.00 at the end of one year.
interest. Compute the interest and the total amount due after 1
Php400,000.00 at the end of three years and a final payment at
year.
the end of five years. What was the final payment if interest
3) Calculate the amount deposited 1 year ago to have P1000 was 20%
now at an interest rate of 5% per year. Calculate the amount of
3) A man borrowed Php5,000.00 from bank and agreed to pay
interest earned during this time period.
the loan at the end of 9 months. The bank discounted the loan
4) Joe put some money into a savings account to generate and gave him Php4,000.00 in cash.
P5000 interest this year. Calculate the amount that had to be
a.) What was the rate of discount?
deposited exactly 1 year ago to earn P5000 in interest now, if
the rate of return is 6% per year. b.) What was the rate of interest?
5) Determine the exact simple interest on P500 for the period c.) What was the rate of interest for one year?
from January 12 to September 28, 2025, at 15% interest
4) Compare the accumulated amounts after 5 years of
6) What will be the future worth of money after 18 months, if Php1,000.00 invested at the rate of 10% compounded:
a sum of P10,000 is invested today at simple interest rate of
12% per year? a) Annually

b) Semi-annually

1) What rate of interest compounded annually must be c) Quarterly

received if an investment of Php5,400 made now will result in
d) Monthly
a receipt of Php 7,200 5 years hence?
e) Daily
2) What amount will be accumulated by Php 4,100 in 10 years
at 6% compounded annually? f) Continuously
3) What effective annual interest rate corresponds to the
following situations?
 i = 10%
Required: A = ?

Solution:
1. $100,000 lent for 3 years at simple i = 10% per year. What
is repayment after 3 years? A=P¿
2. A loan of P50,000 is made for a period of 13 months from
April 1 to April 30 of the following year, at a simple interest
rate of 20%. What future amount is due at the end of the loan 3. A company that makes self-clinching fasteners expects to
period? purchase new production-line equipment in 3 years. If the
new unit will cost Php350,000, how much should the
3. What is the principal amount if the amount of interest at the company set aside each year, if the account earns 10% per
end of 2 1/2 years is 450 for a simple interest rate of 6% per year?
annum? Given:
4. What will be the future worth of money after 12 months, if F = Php350,000
the sum of P25,000 is invested today at a simple interest rate n = 3 yrs.
of 1% per month? i = 10%
Required: A
5. Determine the exact simple interest of P25000 for the
period from Dec 27, 2001 to March 23, 2003, if the rate of Solution:
interest is 10%. A = Php105,738.50
6. $100,000 lent for 3 years at i = 10% per year compounded.
What is repayment after 3 years?

7. What rate of interest compounded annually must be

A=F
( i
( 1+i ¿n−1 )
received if an investment of 5400 made now will result in a
receipt of 7200 in 5 years?
4. A truck driver won a multistate lottery game. The winner
8. What amount will be accumulated by P4100 in 10 years at could choose between a single lump sum of $116.5
6% compounded annually? million or a total of $195 million paid out over 20 annual
9. How long it will take for the money to triple itself if installments (or $9.75 million per year and the first
invested at 8% compounded annually? installment being paid out immediately). The truck driver
opted for the lump sum. From a strictly economic
10. Determine the ordinary simple interest on P35,000 for 7 standpoint, did he make the more lucrative choice?
months and 15 days if the rate of interest is 8%. Given:
i = 8% per year
11. You borrow Php 8,000 from a friend and agree to repay it
A = $9.75 million
in 5 years with an annual interest rate of 3% compounding
N = 19 years.
monthly. How much will you need to repay in total, including
Find: P = ?
the interest?
Solution:

WEEK 3
P= A ¿

Example 1. How much money should you be willing to pay

now for a guaranteed Php600 per year for 9 years starting next
Practice Problems:
year, at a rate of return of 16% per year?
Given: 1. A company awarded two contracts worth a combined
A = Php600 Php 1.07 million the spillway that was severely
n = 9 years damaged in a flood 2 years ago. Because of the weak
i = 16% economy, the bids came in Php 950,000 lower than
Required: P = ? engineers expected. If the projects are assumed to
have a 20-year life, what is the annual worth of the
Solution:
savings at an interest rate of 6% per year?
P= A ¿ 2. A family that won a Php 100,000 prize on A tv show
decided to put one-half of the money in a college
fund for their child who was responsible for the prize.
2. A company that sells high-purity laboratory chemicals is If the fund earned interest at 6% per year, how much
considering investing in new equipment that will reduce was in the account 14 years after it was started?
cardboard costs by better matching the size of the
3. Investing in new equipment that will reduce costs by
products to be shipped to the size of the shipping
matching the size of the products to be shipped to the
container. If the new equipment will cost Php220,000 to
size of the shipping container. If the new equipment
purchase and install, how much must the company save
will cost Php 220,000 to purchase and install, how
each year for 3 years to justify the investment, if the
much must the company save each year for 3 years in
interest rate is 10% per year?
order to justify the investment, if the interest rate is
Given:
10% per year?
P = Php220,000
n = 3 years
GRADIENT 2. Sinking Fund Method

1. UNIFORM ARITHMETIC GRADIENT C o−C L

are a contiguous series of payments paid at regular
intervals where the difference between one payment and the
d=
( 1+i¿ L −1 C n=C 0−Dn Dn=d
i
( ( 1+ i¿n −1
i )
next is calculated by adding some constant value, G.

Pt =Pa + Pg F t=F a + F g
3. Sum of the Years Method
For Present Worth:

G
P a= A ¿ P g= ¿
SYD=
n(n+1)
2
d=
reverse digit
SYD ( (C o−C L ) )
i
reverse digit
Depreciation Factor = C n=C 0−Dn
For Future Worth: SYD

( ( 1+i ¿n−1
) [
G ( 1+i ¿ −1
]
n
F a= A F g= −n
i i i 4. Declining Method

Solution to Sample Problem:

k =1−
√
n Cn
Co
L C

√
=1− L Dn=C 0−C nd=k C0 ¿
Co

Pa=14,274.89P g=3,786.44 Pt =18,061.33 C n=C 0

Co ( )
C L nL
C L =C 0 ¿
F a=24,966.88F g=6,622.50F t=31,589.38

5. Double Declining Method

1. GEOMETRIC GRADIENT

( ) ( ) ( )
2 Co 2
n−1
2
L
2
n

• are a contiguous series of payments paid at regular intervals d= 1− C L =C 0 1− C n=C 0 1−

L L L L
where the difference between one payment and the next is
calculated by multiplying by some constant value, G. Dn=C 0−C n
If g ≠i

For Present Worth: 6. Service Output Method

[ ( )] ( C o−C L
)
n
A 1+ g
P= 1− d n= Qn
i−g 1+i T
For Future Worth:

A 7. Working Hours or Machine Hours Method

F= ¿
i−g
If g=i d n= ( C −C
H )
o
H
L
n

An
P= F=nA ¿
1+i

Sample Problem:

• interest rate = 25% annually

• rate of increase = 20% per year

P=3,013.07 F=7,356.13
DEPRECIATION

1. Straight Line Method

C o−C L d
d= C n=C 0−DnDepreciation Rate=
L Co

Dn=n
Co −C L
L ( )