that branch of gcono- Of definite lavs of Eco. pract s to en- {neering Economy may Y conomic probiens maximum bene it at the east study of cost applications in the da ta and their de ion. 1-02 REASONS FOR STUDYINC ENGINEERING ECONOMICS 4 why engineering economics should + have wrought immense changes well-being of mankind through their ications of scientific principles to ems of industry. Seldom is their any phase where engineers, at one time or another, have hare. In the homes, in the highways, and in the work of engineers are too evident. In vhat- ‘remendous outlays of money have been expended. 2dily admitted that the study of economics will ent use ofPAST FCONOMIC PRINCT life of engineers, it 4 (2) In the professional ao he most successful ones are those who oraq.)!? observed that t euce themselves from the technical aspects of er ly divor P ais 11 tind vho devote their time and efforts to financial pr ne wted to engineering work. Those engineers who ui, managers of their own enterprise or those uy lems mately become Mtners will finally realize that engineering Concern itself with technical aspects, but will ult nsiderations. At that time, their kr, Y tead to economic teage of engineering economy will assume tremendous impor, ance. 1-03 IMPORTANT APPLICATIONS OF ENGINEFRING ECONOMY nd functions of Engineering ‘he most important uses a| are the following: (1) seeking of nev objectives engineering. (2) Discovery of factors 1imiting the success of a venture or enterprise. investment of capital (3) Analysis of possible (4) Comparison of alternatives as (5) Determination of bases for decision An important use of eng ern for engineering applicaticr Seeking of New Objective economy is to seek new objectives Engineers all over the vorld are constantly seeking new ang \ider applications of their technical knovledge for the bene. tit of mankind. In this search, engineering economy provides basic principles and laws. Companies usually conduct market surveys to learn what people need and want. Traffic counts are made and statistics compiled by highway agencies to dis- cover present and future needs and to forecast trends in trans portation. Knowing an objective, the next Discovery of Factors. tain such an objec step is to determine ways and means to at engineering Economy seeks to discover so-called linit- Among called fe the tive. ing factors which may hinder the success of @ project. the limiting factors, there are some outstanding ones, strategic factors, which if altered may be made to insur success of a venture. For instance, inadequacy of capital ‘* ity a new enterprise usually leads to failure, though in real such an enterprise may be worthwhile. This strategic fa may be removed by borrowing some capital or by taking in mor stockholders.oMTC PRINCTPLES 3 ff capital. With the exception of iH a few ca a to earn profit for the ovners of tne capi. s taviag Econony enables engineers to consider aii “ ineet vavestment from both the technical a “ Re eer ing Economy furnishes severa, termine rate of return, annual costs a sit serve as bases for decision, nd financial Alternatives. Most anything that compar toon Sr ished in many ways with Satlarectar ang = ee ee ath varying expenditures. Usually the alterna- e yin accomplish the objective with the least expense ve that “gesirable. The principles of Engineering Economy the BOS;ne analysis of such problems on a quantitative tout enable decision makers to choose the right decision. a tative factors involving risk or uncertainty er to evaluate when principles of Engineering Economy one pases for Decision. The work of engineers is fundamen- taty concerned with future actions ~ on what to do, not on rae has been accomplished. Decisions on future actions are wre valid and their chances for accuracy are improved when wrinciples of Engineering Economy are correctly applied. A forking knowledge of Engineering Economy should improve the ability of an engineer to make correct decisions on all tech- nical matters involving cost. 1-04 ENGINEERING ECONOMY TECHNIQUE The complete analysis of a proposed project involves three basic steps according to Bullinger, as follows: (1) The economy analysis (2) The financial analysis (3) The intangible analysis The economy analysis considers all factors affecting, the economy of the project which can be reduced to specific mone- ‘ary values. It determines the initial cost of the project, ene for operation and maintenance, the needed working fay a the probable income the project will generate Perational, the rate of return on the investment, and all other a a° BASIC ECONOMIC PRINCIPLES {nancial analysis is the a, The primar Urpos: eruiuaion ie inaruatiede and sources of Seat a either through equity capital or borroved caplce os 8 2 cue bination of both. It tries to discover the oes cae financing the project to the extent of the amount Olve tts i, the economy analysis. The financial analys lt dae caciee economy analysis since it is dependent upon the on necessary data. e of the f 1 aspects of the i analysis determines al Eeivilenl eanaa etary values and consi_ 4 to mon project which cannot be reduce’ ; ders the uncertainty and the risk inherent in the project. Ite scope includes the so-called judgement factor ee ysis depends upon the judgement of responsible persons in- volved in the project. A11 of these analyses should be made, studied and corre}. ated with one another to form a sound basis for the decision to implement the project or not. If these analyses are 311 favorable, then a decision in favor of the proposal is not difficult to make. BASIC TERMS AND PRINCIPLES OF ECONOMICS 1-05 TANGIBLE AND INTANGIBLE FACTORS In many economic studies, there are two basic types of factors to be considered. These are: tangible and intangible factors. Tangible factors are those which can be expressed in terms of monetary values, while intangible factors are those which are difficult or impossible to express definitely in terms of monetary values. Intangible factors are also called irredu- cible factors. 1-06 COMPETITION Most economic laws are premised and stated for situations in which free or perfect competition exists. Perfect competition occurs when a certain product is offered for sale by many ven- dors or suppliers, and there is no restriction against other vendors from entering the market. Buyers are free to buy fro® any vendor, and the vendors, like! sell to any- one. ipaste ECONOMIC PRINCTPLES port o ene posite of perfect vompetition, shen a unique product OF service 4 opt curs wor oY ore ngle supplier and entry of a11 other a a Perfect § avatianie * Possible for 2 S10 ated. under conditions of perfect monorry » preveran control the Supply and the price or th!’ examples of monopolies are the seryicw” 9 electric plants throughout the country, ere vmpanies 10 various parts of the country, ang prone fe utiiitiess which are granted the sole right by tr puolic ¥) rurnish the services they are performing es which they possess. These monopolies met ace mbject to Oe Coevgeioe surwoteree eter tan wnich contr ctures of these or util 1-08 oLIGOPOLE urs vhen there are few suppliers and any action e of them will definitely affect the course of en Prine others. Examples of oligopolies in the Pullip- ce are the oil companies and the manufacturers of soft ate Who hold franchises to produce drinks of foreign origin. i is observed that any change anyone of them makes is usually J gepanied by 2 similar change by the other competitors. 1-09 PRICE AND PRODUCTION produc by marae’ ities origopoly OCC’ taken by anyon the price of a good or commodity is defined to be the amount of money or its equivalent which is given in exchange for it. tna capitalistic system, industry is based on profit, and profit is in turn based on price. Goods that are in great demand and are scarce command a high price relative to cost of production and therefore will yield a high profit. Producers of such goods will naturally exert all available means to in- “crease their output. On the other hand, goods that have lit- tle demand command a low price in relation to the cost of Production. Manufacturers of such goods will decrease their Production or, perhaps, cease manufacturing altogether. roauetite therefore regulates production. If prices co UPr broguction ¥ill increase. If prices decrease, production also decrease or cease a