CHAPTER 1

THE ECONOMIC ENVIRONMENT

ENGINNERING ECONOMY- uses mathematical formulas to account for the time value of money and
to balance current and future revenues and costs. It is the analysis and evaluation of the factors that
will affect the economic success of engineering projects.

ECONOMICS- is a social science concerned with man’s problem of issuing scarce resources to satisfy
unlimited wants.

It is the science that deals with the production , allocation and used of goods and services.

Two types:

1. MACROECONOMICS- the study of the entire system of economics.

(from Greek prefix "makros-" meaning "large" + "economics")
2. MICROECONOMICS- study how the system affect one business or parts of the economic
system.

NECESSITIES VS. LUXURIES

NECESSITIES - Products or services that are required to support human life and activities that will be
purchased in somewhat the same quantity even though the prices vary considerably.

LUXURIES – Products or services that are desired by humans and will be purchased if money is
available after the required necessities have been obtained.

GOODS AND SERVICES

GOODS – anything that anyone wants or needs

SERVCES – Performance of any duties or work for another, helpful of professional activity.

DIFFERENT KINDS OF GOODS

1. CONSUMER GOODS – Those such as food and clothing that satisfy human wants or needs.
2. PRODUCER GOODS – Those such as raw materials and tools, used to make consumer goods.
3. CAPITAL GOODS – Machinery used in the production of commodities or producer goods.
Include educational, health, communication, transportations and social services.

LAWOF SUPPLY AND DEMAND

The Law of Supply
 States that at higher prices, producers are willing to offer more products for sale than at
lower prices
 States that the supply increases as prices increase and decreases as prices decrease
 States that those already in business will try to increase productions as a way of increasing
profits.

The law of Demand

 States that people will buy more of a product at a lower price than at a higher price, if
nothing changes
 States that at a lower price, more people can afford to buy more goods and more of an item
more frequently, than they can at a higher price
 States that at lower prices, people tend to buy some goods as a substitute for others more
expensive

TYPES OF DEMAND
1. ELASTIC DEMAND – exists when there is a greater change in quantity demanded as a
response to a change in price.
2. INELASTIC DEMAND –exists when there is a lesser change in quantity demanded in response
to a change in price.

UNITARY- exist when there is an equal change in price and in quantity demanded (increase or
decrease)

FACTORS THAT INFLUENCE DEMAND

1. INCOME – when income increases people are able to buy more.

2. POPULATION – As the population grows, demand for goods and services increases.
3. TASTE AND PREFERENCE – Assuming prices are constant , people go more for the goods
they prefer as shaped by their tastes and biases.
4. PRICE EXPECTATION – When people anticipate price increase, demand for its product
increases
5. PRICE OF RELATED GOODS – When products price increases, people shift to its substitutes,
which known as goods.

FACTORS THAT INFLUENCE SUPPLY

1. PRICE OF GOODS-
2. COST OF PRODUCTON-
3. AVAILABILITY OF RESOURCES-
4. NUMBER OF PRODUCERS AND SELLERS-
5. TECHNOLOGICAL ADVANCEMENT
6. TAXES
7. SUBSIDIES
MARKET STRUCTURES

MARKET- The place where the vendors and buyers meet to transact.
COMPETITION, MONOPOLY AND OLIGOPOLY

PERFECT COMPETITION – Occurs n 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 – opposite of perfect competition. Single person or enterprise as a supplier of particular

commodity
from Greek monos μόνος (alone or single) + polein πωλεῖν (to sell))
monopsony which relates to a single entity's control of a market to purchase a good or
service
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.
 CHAPTER 2

INTEREST – the return on capital or cost of using capital. It is 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 had been accrued
in preceding period.

𝐼 = 𝑃𝑛𝑖
𝐹 = 𝑃 + 𝐼 = 𝑃 + 𝑃𝑛𝑖
𝐹 = 𝑃(1 + 𝑛𝑖)

Where: I = Interest
P = principal or present worth
N = number of interest period
I = rate of interest per interest period
F = accumulated amount or future worth

A. ORDINARY SIMPLE INTEREST

Under ordinary simple interest, it is assumed that each month contains 30 days and
consequently, each year has 360 days

Example:
A loan of 50,000 is made for a period of 13 months from april 1 to april 30 of the
following year,a t a simple interest rate of 20%. What future amount is due at the end
of the loan period?
Ans. 60, 833.33

Ex.2
What is the principal amount if the amount of interest at the end of 2 ½ year is 450
for a simple interest rate of 6% per annum?
Ans. 3000

Ex.3
What will be the future worth of money after 12 months, if the sum of P25,000 is
invested today at simple interest rate of 1% per month?
Ans: P28,000

B. EXACT SIMPLE INTEREST

Under exact simple interest, the exact days per month is used. There are 365 days
per year on ordinary year and 366 days every fourth year called leap year

Ex.1
Determine the exact simple interest of 25000 for the period from Dec 27, 2001 to
March 23, 2003, if the rate of interest is 10%?
Ans. 3095.89
 Ex.2
Determine the exact simple interest of 25000 for the period from Dec 27, 2001 to
March 23, 2004, if the rate of interest is 10%?

CASH- FLOW DIAGRAMS – depict the timing and amount of expenses (negative, downward) and
revenues ( positive, upward0 for engineering projects.

Receipt ( positive cash flow or cash inflow)

Disbursement ( negative cash flow or outflow)

Ex.
A loan of 10000 at simple interest of 10% will become 15000 after 5 years.

COMPOUND INTEREST
The interest for an interest period is calculated on the principal plus total amount of interest
accumulated in previous period. Which compound interest means “ the interest on top of interest”.

The quantity ( 1 + 𝑖)𝑛 is commonly called the single payment compound amount factor and
is designated by the functional symbol F/P, i%,n. thus,
𝐹 = 𝑃 (1 + 𝑖)𝑛
𝐹 = 𝑃( 𝐹 ⁄𝑃, 𝑖%, 𝑛)

The symbol F/P, i%,n is read as “ F given P at i% in n interest periods

Ex. 1
What rate of interest compounded annually must be received if an investment of
5400 made now will result in a receipt of 7200 in 5 years?
Ans. 5.92%

Ex. 2
What amount will be accumulated by 4100 in 10 years at 6% compounded annually
Ans. 7342.48

Ex.3
How long it will take for the money to triple itself if invested at 8% compounded
annually?
Ans. 14.27 years
RATES OF INTEREST

A. NOMINAL RATE OF INTEREST – specifies the rate of interest and a number of interest
period in one year.
i= r/m

Where: i= rate of interest / interest period

R = nominal interest period
M = number of compounding periods

B. EFFECTIVE RATE OF INTEREST – is the actual or exact rate of interest on the principal
during one year

E = F -1
E = ( 1 + 𝑖)𝑚 − 1

Where: E = effective rate

F = future worth rate
i = rate of interest/ interest period
m = number of compounding periods

Ex.1
What effective annual interest rate corresponds to the following situations:
a. Nominal interest rate of 10% compounded semi-annually ans. 10.25%
b. Nominal interest rate of 6% compounded monthly ans. 6.17%
c. Nominal interest rate of 8% compounded quarterly ans. 8.24@

Ex. 2
If 1000 becomes 5734 after 15 years, when invested at an unknown rate of interest
compounded semi-annually, determine the unknown nominal rate and corresponding
effective rate.
Ans. I=12.36% r=12%

Ex.3
What is the equivalent nominal rate compounded monthly of 15% nominal rate compounded
semi-annually?

EQUATION OF VALUE – obtained by setting the sum of values on a certain comparison or local date
of one set of obligations equal to the sum of the values on the same date of another set of
obligations

Ex.1
Jay wishes his son, jayson to receive 1000000 twenty years from now. What amount should
he invest now, if it will earn interest of 12% compounded annually during the first 5 years and
10% compounded monthly for the remaining years.
Ans. P5 = 224 521.34; P0 = 127 399.44
 Ex.2
Find the present worth of a future payment of 300000 to be made in 10 years with an interest
rate of 10% compounded annually. What will be the amount if it will be paid on the 15th year?
Ans. 115 662.99; 483 153.01

CONTINOUS COMPOUNDING INTEREST

𝐹 = 𝑃𝑒 𝑖𝑡

Where: I = interest
i = rate of interest/ interest period
t = number of compounding periods

Ex. 1
Philip invested 100 on bank. The bank offers 5% interest compounded continuously in a
savings account. Determine (a) how long will it require for him to earn 5 (b) the equivalent
simple interest rate for 1 year bank?
Ans. .9758 year; 5.127%

DISCRETE PAYMENTS
The solution in discrete payments or number of transactions occurring at different periods is
taking each transaction to the base year and equating each value.

Ex. 1
Acosta holdings borrowed 9000 from smith corporation on January 1, 1998 and 12000 on
January 1 2000. Acosta holdings made a partial payment of 7000 on January 1, 2001. It was
agreed that the balance of the loan would be amortized by two payments. One on January 1,
2002 and one January 1, 2003.the second being 50% larger than the first. If the interest rate
is 12% what is the amount of each payment?
Ans. 9137.18; 13 705.77

Ex.2
A machine worth P50,000 is expected to last for 3 years. During its operation, a maintenance
cost of P1,000 is needed after the 1st year of operation and P2,000 at the end of the 2nd
year. What present amount is required to operate the machine, if money is worth 16%
compounded quarterly?
Ans. P52, 316.18