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BASIC ECONOMIC PRINCIPLES
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INTRODUCTION
What is Economics?
According to Paul A. Samuelson, Economics is the study of how people and
society choose, with or without the use of money, to employ scarce productive
resources which could have alternative uses, to produce various commodities
over time and distribute them for consumption now and in the future among
various persons and groups of society.
According to Investopedia, Economics is a social science that focuses on the
production, distribution, and consumption of goods and services. The study is
primarily concerned with analyzing the choices that individuals, businesses,
governments, and nations make to allocate limited resources.
According to The Economic Times, Economics is the study of scarcity and how it
affects the use of resources, the production of goods and services, the growth of
production and well‐being over time, and many other important and complicated
issues that affect society.
According to Encyclopaedia Britannica, Economics is the social science that
seeks to analyze and describe the production, distribution, and consumption of
wealth.
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INTRODUCTION
Engineering Economy, also known as
Engineering Economics, is:
According to Quickonomics, A subset of economics concerned with the use and
application of economic principles in the analysis of engineering decisions. It
involves evaluating the costs and benefits of projects, products, and technologies
to determine their economic feasibility and ensure efficient allocation of
resources.
According to Wikipedia, a subset of economics focused on microeconomic
principles and decision-making processes related to the allocation of limited
resources. It integrates economic theory with engineering practice, using tools
like cost–benefit analysis, net present value, and internal rate of return to assess
alternatives
According to The Pro Notes, the study of how to allocate resources to achieve a
specific goal in the most effective way. It applies financial methods—such as net
present value and internal rate of return—to compare alternatives based on their
costs and advantages
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REASONS FOR STUDYING
ENGINEERING ECONOMICS
• Informed Decision-Making • Risk & Lifecycle Analysis
• Financial Feasibility • Business-Engineering Bridge
• Informed Decision-Making
Choose the most cost-effective engineering solution among alternatives
• Financial Feasibility
Assess long-term financial viability using time value of money concepts
• Risk & Lifecycle Analysis
Manage risks and evaluate total project costs over the entire lifecycle
• Business-Engineering Bridge
Communicate strategies clearly and align engineering decisions with
business goals
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IMPORTANT APPLICATIONS OF
ENGINEERING ECONOMY
The most important uses and functions of Engineering
Economy are the following:
01 02 03 04 05
• Seeking of • Discovery of • Investment • Comparison of • Bases for
New Factors of Capital Alternatives Decision
Objectives
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ENGINEERING ECONOMY
TECHNIQUE
The complete analysis of a proposed project involves three
basic steps according to Bullinger, as follows:
[Link] economic analysis
[Link] financial analysis
[Link] intangible analysis
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BASIC TERMS AND
PRINCIPLES OF ECONOMICS
• Tangible and Intangible
• Monopoly
Factors
• Competition • Oligopoly
• Tangible factors are elements that can be expressed in monetary terms—like
equipment costs—while intangible factors are those that often lack a clear
monetary value, such as employee morale, brand reputation, or customer
goodwill.
• In economics, competition refers to the independent rivalry among two or more
parties striving to secure business by offering the most favorable terms, which
leads to increased efficiency, innovation, and lower prices.
• A monopoly exists when a single firm is the only supplier of a particular good or
service in the market, enabling it to set prices without facing competition due to
high entry barriers or lack of viable substitutes.
• An oligopoly is a market structure dominated by a small number of firms whose
pricing and output decisions significantly affect one another, often leading to
collusion or strategic interdependence.
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BASIC TERMS AND
PRINCIPLES OF ECONOMICS
• Price and Production • Consumer and Producer Goods
• Local and National Market • Demand
• Price refers to the amount of money required to buy a good or service, determined in a free market by
the interplay between supply and demand—serving as a key indicator of scarcity and value.
• Production is the economic process of combining various inputs—both tangible (like materials) and
intangible (like knowledge)—to create goods or services that provide value and utility.
• A local market operates within a limited geographical area such as a town or city, where goods and
services are exchanged among nearby buyers and sellers.
• A national market encompasses an entire country, where firms distribute goods and services across
the domestic territory, aligning with broader consumer bases and regulatory environments.
• Consumer goods are finished products sold directly to individuals for personal use or enjoyment—such
as food, clothing, and appliances.
• Producer goods (also known as capital goods) are items used by businesses to manufacture other
products or services, like machinery, raw materials, and tools.
• Demand is the quantity of a good or service that consumers are both willing and able to purchase at
various prices during a given timeframe, emphasizing that both desire and purchasing power matter.
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BASIC TERMS AND
PRINCIPLES OF ECONOMICS
• Law of Demand • Utility and Demand
• Elasticity of Demand • Law of Diminishing Utility
• The Law of Demand states that, when the price of a good rises, the quantity
demanded falls—and when the price falls, the quantity demanded rises—resulting
in a downward-sloping demand curve.
• Elasticity of Demand measures how sensitively the quantity demanded of a good
responds to changes in price (or other variables), with demand being elastic
when quantity changes a lot for a small price change, and inelastic when it
changes little.
• Utility represents the total satisfaction or benefit a consumer derives from a
good or service, and demand reflects the willingness and ability to buy that good,
with utility influencing the demand function.
• The Law of Diminishing (Marginal) Utility states that as a person consumes
additional units of a good, the extra satisfaction (marginal utility) gained from
each subsequent unit decreases
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BASIC TERMS AND
PRINCIPLES OF ECONOMICS
• Marginal Utility • Law of Supply
• Supply • Law of Supply and Demand
• Marginal Utility is the additional satisfaction or benefit a consumer gains from
consuming one more unit of a good or service, which can be positive, negative, or
zero depending on the situation.
• In economics, supply is the quantity of a good or service that producers are
willing and able to offer for sale at various prices—typically increasing as price
rises.
• The Law of Supply states that, ceteris paribus, an increase in the price of a good
leads to an increase in the quantity supplied, resulting in an upward-sloping
supply curve.
• This fundamental principle (Law of Supply and Demand) holds that increasing
prices tend to boost supply but reduce demand, while decreasing prices lower
supply and raise demand, with the equilibrium price occurring where supply and
demand curves intersect
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BASIC TERMS AND
PRINCIPLES OF ECONOMICS
• Physical and Economic
• Law of Diminishing Returns
Efficiency
• Marginal Revenue and • Compromise Between
Marginal Cost Perfection and Economy
• The Law of Diminishing Returns states that when one input in a production process is increased while other
inputs remain fixed, the resulting additional output will eventually decrease, meaning each extra unit of the
variable input contributes less and less to total output.
• Marginal Revenue (MR) is the extra income a firm earns from selling one additional unit of output. While Marginal
Cost (MC) is the additional cost incurred from producing one more unit of a good or service. Firms maximize
profit by producing up to the point where MR equals MC, beyond which additional production reduces profitability
• Physical (Technical) Efficiency refers to producing the maximum output for a given set of inputs—essentially,
doing things right. While, Economic Efficiency means achieving the desired output at the lowest possible cost,
where the value (or “worth”) of outputs exceeds costs—essentially, doing the right things profitably. Between the
two, economic efficiency generally takes precedence in engineering evaluations, since technically optimal
solutions that are not economically viable cannot be implemented.
• This principle (Compromise Between Perfection and Economy) recognizes that seeking perfect technical quality
often demands higher costs, so in practice, decision-makers aim for a balance: achieving sufficient functionality
without excessive expense—because overly perfect solutions may become impractical or unaffordable.
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