November 8, 2021

The Economic Environment

Consumer and Producer Goods and Services
➢ Consumer goods and services- those products or services that are directly used by
people to satisfy their wants
➢ Producer goods and services- used to produce consumer goods and services or other
producer goods

Necessities and 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 price varies
considerably
➢ Luxuries- products or services that are desired by humans even though the price
varies considerably

Demand
➢ Demand- the quantity of 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
proportionate increase in sales
➢ Unitary Elasticity of Demand- occurs when the mathematical product of volume and
price is constant

Competition, Monopoly and Oligopoly

➢ Perfect Competition- occurs in a situation where a commodity or service is supplied by
several vendors and there is nothing to prevent additional vendors entering the market
➢ Monopoly- opposite of perfect competition.
o Perfect monopoly- exists when a unique product or service available from a single
vendor and that vendor can prevent the entry of all others into the market
➢ 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.

The Law of Supply and Demand

➢ Supply - the quantity of certain commodity that is offered for sale at a certain price at a
given place and time

The law of Demand is stated as: “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”

The Law of Diminishing Returns

“When the use of the one of the factors of the production is limited, either in
increasing cost or by absolute quantity, a point will be reached beyond which an
increase 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.”
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INTEREST AND MONEY TIME RELATIONSHIPS

Capital
➢ Capital- wealth in the form of money or property that can be used to produce more
wealth. “Money has a time value.”

Note: The following reasons why P100.00 today is “worth” more than P100.00 one year
from today:
▪ Inflation
▪ Risk
▪ Cost of money (interest)
➢ Cost of Money- determined by an interest rate.
o predictable; thus it is essential component of economic analysis.
o represented by money paid for the use of borrowed money, or return of investment.
➢ Types of Capital
o Equity Capital- owned by individuals who have invested their money or property in a
business project or venture in the hope of receiving profit.
o Borrowed Capital- obtained from lenders for investment with a promise to repay the
principal and interest on a specific date, whether or not the operations of the
business have been profitable or not. In return, the lenders receive interest from
the borrowers.

CASH FLOW
• Engineering projects generally have economic consequences that occur over an extended
period
– For example, if an expensive piece of machinery is installed in a plant were brought on
credit, the simple process of paying for it may take several years
– The resulting favorable consequences may last as long as the equipment performs its
useful function
• Each project is described as cash receipts or disbursements (expenses) at different points in
time
• The expenses and receipts due to engineering projects usually fall into one of the following
categories:

1) First cost: expense to build or to buy and install

2) Operations and maintenance (O&M): annual expense, such as electricity, labor, and
minor repairs
3) Salvage value: receipt at project termination for sale or transfer of the equipment (can
be a salvage cost)
4) Revenues: annual receipts due to sale of products or services
5) Overhaul: major capital expenditure that occurs during the asset’s life

Cash Flow Diagram

- a graphical representation of cash flows drawn in a time scale.
Elements of a Cash Flow Diagram
➢ Horizontal line- representation of time with progression of time moving from left to right.
a. The period labels can be applied to intervals of time rather than to point on a time
scale.
b. Time interval is divided into an appropriate number of equal periods.
➢ Arrows- representation of cash flow; placed at a specified period.
a. Downward arrow- cash outflows (expenditures, disbursements)
b. Upward arrows- cash inflows (income)
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➢ Depends on the person’s viewpoint – all such cashflows are considered to occur at the end of
their respective periods.
Example: A man borrowed PHP1,000 from a bank at 8% interest. Two end-of-year payments: at the
end of the first year, he will repay half of the PHP 1000 principal plus the interest that is due. At the
end of the second year, he will repay the remaining half plus the interest for the second year.
Cash flow for this problem is:
End of Year Cashflow
0 +Php 1000
1 -Php 500
-Php 80
2 -Php500
-Php 40

1,000

1 2

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