1.1.

The Economic Environment

Engineering Economy
It is the analysis and evaluation of the factors that will affect the economic success of
engineering projects to the end that a recommendation can be made which will ensure
the best use of capital.
Consumer and Producer Goods and Services
Consumer goods and services are those products or services that are directly used by
people to satisfy their wants.
Producer goods and services are used to produce consumer goods or services or other
producers' goods.
Necessities and Luxuries
Necessities are those products or services that are required to support human life and
activities that will be purchased in somewhat the same quantity even though the price
varies considerably.
Luxuries are those products or services that are desired by humans and will be
purchased if money is available after the required necessities have been obtained.
Demand
It is the quantity of a certain commodity that is bought at a certain price at a given place
and time.
Elastic demand occurs when a decrease in selling price results in a greater than
proportionate increase in sales.
Inelastic demand occurs when a decrease in a selling price produces a less than
proportionate increase in sales.
Unitary elasticity of demand occurs when a mathematical product of volume and price is
constant.
Competition, Monopoly and Oligopoly
Perfect competition occurs in a situation where a community or service is supplied by a
number of vendors and there is nothing to prevent additional vendors entering the
market.
A monopoly is the opposite of perfect competition. A perfect monopoly exists when a
unique product or service is available from a single vendor and that vendor can prevent
the entry of all others into the market.
An oligopoly exists 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.

Law of Supply and Demand

Supply is the quantity of a certain commodity that is offered for sale at a certain price at
a given place and time.
"Under conditions of perfect competition, the price at which a given product will be supplied
and purchased is the price that will result in the supply and the demand being equal."
This is the graph of the Law of Supply and Demand.

Law of Demand
States that " if all other factors are equal, the higher the price of a good, the less people
demand those goods." In other words, the higher the price the lower the quantity
demanded.
 Law of Supply
States that "the higher the price, the higher the quantity supplied"

The Law of Diminishing Returns

"When the use of one of the factors of production is limited, either in increasing cost or by
absolute quantity, a point will be reached beyond which an increase in the variable factors will
result in a less than proportionate increase in output."
1.2. Simple Interest and Money-
time Relationship
▶ SIMPLE INTEREST 
In this module, we will study a simple interest.

Time value of money

It is defined as the time-dependent value of money stemming both from changes in the purchasing
power of money (inflation or deflation) and from the real earning potential of alternative investment
over time

                                      

Interest 

It is the amount of money paid for the use of borrowed capital or income produced by money that has
been loaned.

Simple interest

Simple interest is calculated using the principal only, ignoring any interest that had been accrued in
preceding periods.
I=Pni
but
F=P+I
F = P + P n i 
F = P (1 + n i)

Where:

F = future worth or accumulated amount

I = interest
P = principal amount
n = no. of interest period
i = rate of interest per interest period

Types of Interest

a). Ordinary simple interest

It is computed on the basis of 12 months, 30 days each or 360 days per year.
One (1) interest period = 360 days

b). Exact simple interest

It is computed on the basis of exact number of days in a year, 365 days for an ordinary
year, and 366 days for leap year.
One (1) interest period = 365 days or 366 days

Sample Problem no. 1

Determine the ordinary simple interest on P700 for eight months and 15 days if the rate
of interest is 15%.
Solution
To solve for ordinary simple interest,

I=Pni
n = 8 months & 15 days =
n = 255 days

therefore,

Sample Problem no. 2

Determine the exact simple interest on P 500 for the period from January 10 to October
28, 1996, at 16% interest.
Solution
To solve for exact simple interest

I=Pni

Solving for n,

January 10 -31 = 21 days (excluding January 10)

February = 29 days
March = 31 days
April = 30 days
May = 31 days
June = 30 days
July = 31 days
August = 31 days
September = 30 days
October 28 = 28 days (including October 28)
Total = 292 days

n = 292 days

Sample Problem no. 3

What is the future amount in sample problem no. 2 at the end of October 28, 1996?

Solution
To solve for the future amount,

F=P+I
F = 500 + 63.83
F = 563.83

Sample Problem no. 4

What is the annual rate of interest if P265 is earned in 4 months on an investment of
P15,000?
Solution
Using,

I=Pni

265 = (15,000)(412412)(i)
i = 0.053 (100%)
i = 5.3%

1.3. Cash-flow Diagram

▶ CASH-FLOW DIAGRAM
In this module, we will study the cash-flow diagram and compound interest.
Cash-flow Diagram

It is the graphical presentation of each flows drawn on a time scale.

 ↑receipt (positive cash flow or cash inflow)

 ↓disbursement (negative cash flow or cash outflow)

To illustrate the above principles please refer to the sample problem below.
Sample Problem no. 5
A loan of P100 at a simple interest of 10% will become P150 after 5 years.
Compound Interest
It is the interest for an interest period is calculated on the principal plus total amount of
interest accumulated in previous periods.
It also means the interest on top of interest.
F
=

P(1 + i)n

(1 + i)n - called the "single payment compound amount factor" and is designated by the functional
symbol F/P, i %, n. Thus,

F = P(F/P, i%, n)

The symbol F/P, i %, n is read as "F given P at i percent in n interest periods." From the above
equation,
(1 + i)-n - called the "single payment present worth factor" and is designated by the
functional symbol P/F, i%, n. Thus,
P = F(P/F, i%, n)
The symbol P/F, I %, n is read as "P given F at i percent in n interest periods."
Rates of Interest
a). Nominal rate of interest
The nominal rate of interest specifies the rate of interest and a number of interest
periods in one year.

where
i = rate of interest per interest period
r = nominal rate of interest
m = no. of compounding periods per year (shall be multiplied by the number of years)
If the nominal rate of interest is 10%,