Chapter 1.

1 Definitions

Intended Learning Outcomes: At the end of this chapter, the students are expected to:

1. Define engineering economic terminology and symbols

1.1.1 Description

Engineering – collection of techniques that simplify comparisons of alternatives on an

Economy economic basis
– involves decision-making for engineering systems

Alternatives – one of two or more available possibilities/options.

Economic Decision

Rational, thoughtful decision making follows a seven-step process that you may be
following now (at least sub-consciously):

Identify your
goal

Collect
relevant
information

Identify the
alternatives &
consequences

Review the
evidence

Make your
economic
decision

Implement
your decision

Review your
decision

Resources

Land – all gifts of nature, such as water, air, minerals, sunshine, plant and
tree growth, as well as the land itself which is applied to the production
process

Labor – the efforts, skills, and knowledge of people which are applied to the
production process
Capital – wealth in the form of money or other assets owned by a person or
organization or available or contributed for a particular purpose such as
starting a company or investing

Adding Value – the increase in value that a business creates by undertaking the
production process.

Types of Capital

Real Capital – things which have been produced which are used in further production

Financial – assets and money which are used in the production process
Capital

Human – education and training applied to labor in the production process

Capital

1.1.2 Consumer and Producer Goods and Services

Consumer Goods and Services Producer Goods and Services

used directly by consumers to satisfy
their needs/wants
used for final consumption
used for production of other goods
sold from one manufacturer, to one or
more manufacturers until made to
consumer goods

Commodity –a basic good used in commerce that is interchangeable with other goods
of the same type; most often used as inputs in the production of other
goods or services

Types of Consumer Goods and Services

Durable – have a significant lifespan, often three years or more

Non-durable – for immediate/almost immediate consumption and have a lifespan

ranging from minutes to three years

Services – intangible products/actions that are typically produced and consumed

simultaneously

1.1.3 Luxuries and Necessities

Necessity Luxury
something that everybody needs inessential, desirable item that is
expensive/difficult to obtain

Types of Consumer Goods based on Income

Inferior – products that people are more likely to buy when their income falls

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Normal – products that people buy all the time; everyday basic needs

Luxury – products more likely bought when income rises

Luxury Goods and Status

Veblen Good – items that people can use to show off their social status
– as prices go up, people become more likely to buy the product, because
they assume that a higher price tag means higher quality

Luxury Brands

The most valuable luxury brands fall into three categories: clothing, leather
goods, and jewelery.

1.1.4 Demand

Demand is an economic principle referring to a consumer's desire to purchase

goods and services and willingness to pay a price for a specific good or service.

Types of Demand

Elastic – occurs when a decrease in selling price result in a greater than

proportionate increase in sales

Inelastic – occurs when a decrease in the selling price produces a less than
proportionate increase in sales

Unity – occurs when the mathematical product of volume and price is constant
Elasticity of
Demand

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1.1.5 Competition, Monopoly, and Oligopoly

Perfect – occurs in a situation where a commodity/service is supplied by a

Competition number of vendors and there’s nothing to prevent additional vendors
entering the market

Monopoly – opposite of perfect competition; the exclusive possession or control of

the supply of or trade in a commodity/product or service

Oligopoly – a state of limited competition, in which a market is shared by a small

number of producers or sellers; exists when there are so few suppliers of
a product or service; action by one will inevitably result in similar action
by others

1.1.6 The Law of Supply and Demand

The Law of Supply and Demand is a theory that explains the interaction between
the sellers of a resource and the buyers for that resource. The theory defines what
effect the relationship between the availability of a particular product and the desire (or
demand) for that product has on its price.

Generally, low supply and high demand increase price and vice versa.

1.1.7 Terms and Symbols

P - value or amount of money at a time designated as the present or time 0

- also referred to as present worth (PW), present value (PV), net present value (NPV),
discounted cash flow (DCF), and capitalized cost (CC); monetary units

F - value or amount of money at some future time.

- also called future worth (FW) and future value (FV); dollars/pesos

A - series of consecutive, equal, end-of-period amounts of money

- also called the annual worth (AW) and equivalent uniform annual worth (EUAW);
dollars/pesos per year

n - number of interest periods; years, months, days

i - interest rate per time period; percent per year, percent per month
t - time, stated in periods; years, months, days

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