Module 1: INTRODUCTION 3.
Capital Goods – machinery, used in the
production of commodities in producer goods.
Engineering Economic Terms and Symbols
Engineering Economy
Supply
application of economic principles to
engineering problems. how many of a certain good or services are
analysis and evaluation of the factors that available for people to purchase.
will affect the economic success of
Demand
engineering projects to the end that a
recommendation can be made which will how many people wish to buy that good or
insure the best use of capital. service.
Economics Law of Supply and Demand
science that deals with the production, Under conditions of perfect competition, the
allocation and use of goods and services. price at which a given product will be
supplied and purchased is the price that will
result in the supply and demand being
The two major subdivisions of economics are: equal.
a. Macroeconomics - study of the entire system of
economics. Demand
b. Microeconomics - study of how the systems people’s willingness to buy a product or
affect one business or parts of the economic service.
system.
Demand Curve
plot or graph of the quantity demanded
Necessities versus the price.
products or services that are required to Demand Schedule
support human life and activities.
schedule or table listing of the quantity
Luxuries demanded with the corresponding price.
products and services that are desired by
humans and will be purchased. Types of Demand
Goods 1. Elastic Demand – exists when there is a greater
change in quantity demanded as a response to a
anything that anyone wants or needs.
change in price.
Services
2. Inelastic Demand – exists when there is a
performance of any duties or work for lesser change in quantity demanded as a response
another; helpful or professional activity. to a change in price.
Marketing 3. Unitary Demand – exists when there is an equal
change in price and quantity demanded (increase
distribution of goods and services. or decrease).
Marketing a Product
advertising, and other efforts to promote a Factors that Influence Demand are:
products sale. 1. Income
2. Population
Different Types of Goods 3. Taste and preference
1. Consumer Goods – food and clothing that 4. Price Expectation
satisfy human wants and needs.
5. Price of Related Goods
2. Producer Goods – raw materials and tools,
used to make consumer goods.
Supply
willingness of a producer to manufacture
goods.
Supply Curve
plot or graph of the quantity supplied versus
the price.
Supply Schedule
schedule or table listing of the quantity
supplied with the corresponding price.
Factors that Influence Supply are:
1. Price of Goods
2. Cost of Production
3. Availability of Resources
4. Number of Producer and Sellers
5. Technological Advancement
6. Taxes
7. Subsidies
Relationship of Supply and Demand
a. Shortage – the supply is less than the demand.
b. Surplus – the supply exceeds the demand.
c. Equilibrium Point – the supply is equal to the
demand.
Market
where the vendors and buyers meet to
transact.
Market Structures
a. 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.
b. Perfect Monopoly – exist when a unique
product or services is available from a single
vendor and that the vendor can prevent the entry of
all others into the market.
c. 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.
2. Embody creative and innovative technology and
ideas;
3. Permit identification and scrutiny of their
estimated outcomes; and
4. Translate profitability to the “bottom line” through
Engineering Economics also uses equations a valid and acceptable
and procedures which utilize the following
measure of merit.
symbols:
Here are some situations where engineering
economic analysis plays an important role.
value or amount of money at a time 1. Choosing the best design for a high-efficiency
designated as the present or time 0. Also, P is gas furnace.
referred to as present worth (PW), present
value (PV), net present value (NPV), 2. Selecting the most suitable robot for a welding
operation on an automotive
discounted cash flow (DCF), and capitalized
cost (CC); monetary units, such as pesos assembly line.
3. Making a recommendation about whether jet
airplanes for an overnight
value or amount of money at some future
time. Also, F is called future delivery service should be purchased or leased.
worth (FW) and future value (FV); pesos 4. Determining the optimal staffing plan for a
computer help desk.
series of consecutive, equal, end-of-
period amounts of money. Also, A is called the
annual worth (AW) and equivalent uniform These are the seven fundamental principles of
annual worth (EUAW); pesos per year, pesos engineering economy.
per month 1. Develop the alternatives.
The final choice (decision) is among alternatives.
amount of money earned or paid over Alternatives need to be identified and then defined
time based on an initial amount and interest for subsequent analysis.
rate; monetary units, such as pesos
2. Focus on the differences.
number of interest periods; years, months, Only the differences in expected future outcomes
days among the alternatives are relevant to their
comparison and should be considered in the
decision.
interest rate per time period; percent per
year, percent per month
3. Use a consistent viewpoint.
The prospective outcomes of the alternatives,
time, stated in periods; years, months, economic and other, should be consistently
days developed from a defined viewpoint (perspective).
Additional symbols used in this course are 4. Use a common unit of measure.
defined in the succeeding modules. Using a common unit of measurement to
enumerate as many of the prospective outcomes
as possible will make easier the analysis and
Principles of Engineering Economics comparison of alternatives.
Solutions to engineering problems must:
1. Promote the well-being and survival of an 5. Consider all relevant criteria.
organization;
Selection of a preferred alternative (decision 2. Define the goal or objective: What is the task?
making) requires the use of a criterion (or several
3. Assemble relevant data: What are the facts? Are
criteria).
more data needed,
The decision process should consider the
and is it worth more than the cost to obtain it?
outcomes enumerated in the monetary unit and
those expressed in some other unit of 4. Identify feasible alternatives.
measurement or made explicit in a descriptive
manner. 5. Select the criterion for choosing the best
alternative: possible criteria include political,
economic, environmental, and humanitarian. The
single criterion may be a composite of several
different criteria.
6. Make uncertainty explicit.
6. Mathematically model the various
Uncertainty is inherent in projecting (or estimating) interrelationships.
the future outcomes of the alternatives and should
7. Predict the outcomes for each alternative.
be recognized in their analysis and comparison.
8. Choose the best alternative.
9. Audit the results.
7. Revisit your decisions.
Improved decision-making results from an adaptive
process; to the extent practicable, the initial Some of the exceptional facets of the decision-
projected outcomes of the selected alternative making process are:
should be subsequently compared with actual 1. Cost-accounting systems, while an important
results achieved. source of cost data, contain allocations of indirect
costs that may be inappropriate for use in economic
analysis.
Engineering Economics and the Design
Process 2. The various consequences--costs and
benefits---of an alternative may be of three types:
The procedure in an engineering economy
analysis are as follows: (a) Market consequences - there are established
market prices
1. Problem definition. Identify and understand the
problem; identify the objective of the project. (b) Extra-market consequences - there are no
direct market prices, but prices can be assigned by
2. Development of alternatives. Collect relevant, indirect means
available data and define viable solution
alternatives. (c) Intangible consequences - valued by
judgment, not by monetary prices
3. Development of prospective outcomes. Make
realistic cash flow estimates.
4. Selection of a decision criterion. Identify an 3. The economic criteria for judging alternatives
economic measure of worth criterion for decision can be reduced to three cases:
making. (a) For fixed input: maximize benefits or other
5. Analysis and comparison of alternatives. outputs.
Evaluate each alternative; consider noneconomic (b) For fixed output: minimize costs or other
factors; use sensitivity analysis as needed. inputs.
6. Select the best alternative. (c) When neither input nor output is fixed:
7. Performance monitoring and post evaluation maximize the difference between benefits and
of results. Implement the solution and monitor the costs or, more simply stated, maximize profit.
results. The third case states the general rule from which
both the first and second cases may be derived.
Cost Concepts for Decision Making
The following nine steps can be followed 4. To choose among the alternatives, the market
sequentially: consequences and extra market consequences are
organized into a cash flow diagram. From this
1. Recognize the problem. comparison plus the consequences not included in
the monetary analysis, the best alternative is 2. selection of method to be used; In
selected. digging ditches or irrigation canals, manual labor or
ditch digging machine may be used and both
5. An essential part of engineering decision making
methods will give satisfactory results.
is the post audit of results. This step helps to
ensure that projected benefits are obtained and to 3. selection of design; In the design of a
encourage realistic estimates in analyses. machine to produce a certain product, the engineer
responsible for the work will usually make as many
designs as possible and from which, by a process
of elimination.
4. selection of site location for a project; In
Present Economic Studies the choice of a factory site, many factors are to be
considered, among which are the cost of the land,
Engineering economic analysis is ideally suited the construction cost at the different possible sites,
for studies of this nature: the availability of skilled labor, and many other
factors.
1. The issue is sufficiently important to explain our
serious considerations 5. comparison of proficiency among
workers; In industrial operations where the
and efforts.
efficiency of workers is a factor affecting costs, it is
2. The problem cannot be solved in one's own usually observed that workers have varying
mind, that is, a thorough efficiencies.
study would require us to organize the problem and 6. economy of tool and equipment
all its various maintenance; In many activities, tools have to be
sharpened from time to time, and equipment have
consequences.
to be kept in optimum operating condition all the
3. In making a decision the issue is economically time.
relevant.
7. economy of number of workers; In many
industrial operations, it is observed that a certain
number of workers cooperating on a specific phase
Engineering economic analysis is used to of the work will lead to the highest productivity.
answer many different questions.
⮚ Which engineering projects are worthwhile: Has
the mining or petroleum engineer shown that the
mineral or oil deposit is worth developing?
⮚ Which engineering projects should have a higher
priority: Has the industrial engineer shown which
factory improvement projects should be
funded with the available fund?
Engineering economic analysis can also be
used to answer questions that are personally
important.
⮚ How to make short and long-term investment
decisions: Is a higher salary better than stock
options? Should you buy a 1-or 2-semester parking
pass?
Present economy studies occur in the following
situations:
1. selection of materials; In manufacturing a
product, it usually happens that two or more
materials are available and such materials will be
equally satisfactory.