Module 1 ECONOMICS PDF

UNIVERSITY OF LA SALETTE,INC
COLLEGE OF ENGINEERING AND ARCHITECTURE

SANTIAGO CITY, PHILIPPINES
Module 1: Basic Economic Environment and Concept

Introduction
The story of how Dr. Bose got motivated to invent a directional home speaker and eventually
transformed his invention into a multimillion-dollar business is not an uncommon one in today's market.
Companies such as Dell, Microsoft, and Yahoo all produce computer-related products and have market
values of several billion dollars. These companies were all started by highly motivated young college
students just like Dr. Bose. Another thing that is common to all these successful businesses is that they
have capable and imaginative engineers who constantly generate good ideas for capital investment,
execute them well, and obtain good results. You might wonder about what kind of role these engineers
play in making such business decisions. In other words, what specific tasks are assigned to these
engineers, and what tools and techniques are available to them for making such capital investment
decisions?
In this module, we will consider many investment situations, personal as well as business. The
focus, however, will be on evaluating engineering projects based on economic desirability and in light of
the investment situations that face a typical firm.
Learning Outcomes
At the end of this module, you are expected to
a. Define Engineering Economics
b. Analyze and evaluate the factors that will affect the economic success of engineering
projects.
c. Calculate economic problems which deal with the effect of time such as the time value
of money, interest, and depreciation.
Lecture
Topic 1: Definition
What is Economics?
Adam Smith (1723-1790), a Scottish professor of philosophy at Glasgow University, whose
writings "An Inquiry into the Nature and Causes of the Wealth of Nations'in 1776, formed the basis of
classical economics, defined economies as the study of the nature and causes of national wealth or simply
as the study of wealth.
Alfred Marshall (1842-1924), an English professor of political economy at Cambridge

University who depicted precise mathematical relationships between economic variables in this textbook
Principles of Economics in 1890, defined economics as the study of man in the ordinary business of life.
Arthur Cecil Pigou (1877-1959), an English student of Professor Albert Marshall, who
succeeded him as professor of political economy at Cambridge University and developed the theory of
welfare economics in his book "The Economics of Welfare in 1915. defined economics as the study of
economic welfare which can be brought directly or indirectly into relationship with the measuring-rod of
money
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Lionel Robbins, an economist in the tradition of the English classical school defined economics
as the science which studies human behavior as a relation between ends and scarce means have other
alternative uses.
Collins dictionary of Economics defined economics as the study of the problems of using
available factors of production as efficiently as possible to attain the maximum fulfillment of society's
unlimited demands for goods and services.
While the standpoints of well-known economists and professors of economics to the definition of
the subject "economics' may vary, the main idea remained that in every human activity, in one way or
another, is connected with either money or time or both.
In simplest definition, economics is the wise use of both money and time.
What is Money?
There are a lot of definitions of money. However, the most acceptable was that of Geoffrey Crowther
who describes the major functions of money.
According to him, money is anything that is generally acceptable as a means of exchange (i. e. as a
means of settling debts) and at the same time acts as a measure and a store of value.
The money which is now used as a medium of exchange on local, national and international markets
has evolved from shells, elephant tusks, animal skins to metallic money (Le coins) to paper money after
the invention of printing press in 18th century to finally bank money i.e. currency) with the
development of the banking system.
With the currency system, a standard unit called "monetary unit forms the basis of a country's domestic
money supply. In the Philippines, the monetary unit is peso while dollar and pounds for the United
States and United Kingdom, respectively.
The physical form of the money supply (bank notes, coins, etc.), the denomination of the values of
monetary units (peso and centavos) and the total size of the money supply of the country are regulated
through the policies and guidelines of what is known as the monetary system
Money can fulfill the following functions:
A. As a medium of exchange
Goods and services can be exchanged for money, which can be exchanged for other
goods and services.
B. As a unit of account
The units in which money is measured (pesos, dollars, pounds, etc.) are used as the
units in which prices, financial assets, debts, accounts, etc. are measured.
C. As a store of value
A portion of a person's income may be used for immediate consumption while the rest
may be held in some form to yield future consumption. Since money grows with time, the
money held over a period of time as a store of value or purchasing power.
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What is Engineering Economics?
Engineering economy is the analysis and evaluation of the monetary consequences by using the
theories and principles of economics to engineering applications, designs, and projects.
Engineering economy may also be defined as the study of problems involving economic solutions with
the concept of obtaining the maximum productivity or reward at least cost or risk. It is the study of the
desirability of making an investment.
Topic 2: Economic Environment
Engineering economy 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 insure 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 and services or other
producer 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
Demand is the quantity of a certain commodity that is bought at a certain price at a given place
and time.
Competition, Monopoly and Oligopoly
Perfect competition occurs in 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 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.
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.
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The Law of Supply and Demand
The Law of Supply and Demand may be stated as follows:
“Under conditions of perfect competition, the price at which any given product will be supplied and
purchased is the price that will result in the supply and the demand being equal."
For general application, the curves for supply and demand are no longer represented in linear function.
This figure illustrates the price - supply – demand relationship,

showing equal supply at a given price.
When there is additional supply without an

additional demand, a new and lower price
is established.
When there is additional demand without an

additional supply, a new and higher
price is established
Topic 3: Present Economy
Present economy involves economic problems which deal with immediate or present situations
and costs. Under these studies, the effect of time such as the time value of money, interest and
depreciation are negligible that it need not be considered in the solution to the problems.
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Examples
1. A manufacturing firm maintains one product assembly line to produce signal generators
Weekly demand for the generators is 35 units. The line operates for 7 hours per day, 5 days per
week. What is the maximum production time per unit in hours required of the line to meet the
demand?
Solution
Let t = maximum production time per unit
7 ℎ𝑜𝑢𝑟𝑠 5 𝑑𝑎𝑦𝑠 1 𝑤𝑒𝑒𝑘

t=( )( )( )
𝑑𝑎𝑦 𝑤𝑒𝑒𝑘 35 𝑢𝑛𝑖𝑡𝑠
t = 1 hour per unit Ans
2. By selling balut at P 5 per dozen, a vendor gains 20%. The cost of the eggs rises by 12.5%. If he
sells at the same price as before, find his new gain in %.
Solution
Let x = original cost of a dozen of balut
Cost + profit = 5 cost + profit = 5

x + 0.20x = 5 4.69125 + (% gain) (4.69125) = 5
1.20x = 5 % gain = 0.0658
x = 4.17 (cost per dozen of balut) % gain = 6. 58% Ans
Let y = new cost of a dozen of balut
y = 1.125x
y = 1.125(4.17)
y = 4.69125
Summary:
In simplest definition, economics is the wise use of both money and time.
According to him, money is anything that is generally acceptable as a means of exchange (i. e.
as a means of settling debts) and at the same time acts as a measure and a store of value.
The money which is now used as a medium of exchange on local, national and international
markets has evolved from shells, elephant tusks, animal skins to metallic money (Le coins) to paper
money after the invention of printing press in 18th century to finally bank money i.e. currency) with the
development of the banking system.
Money can fulfill the following functions: As a medium of exchange, As a unit of account, As a
store of value.
Engineering economy is the analysis and evaluation of the monetary consequences by using the
theories and principles of economics to engineering applications, designs, and projects.
Present economy involves economic problems which deal with immediate or present situations
and costs. Under these studies, the effect of time such as the time value of money, interest and
depreciation are negligible that it need not be considered in the solution to the problems.
5
Reference:
Park, C. S. (2012). Fundamentals of Engineering Economics. Chan S. Park. Pearson Education.

Sullivan, W. G., Wicks, E. M., & Luxhoj, J. T. (2003). Engineering economy (Vol. 13). Upper Saddle River,
NJ: Prentice Hall.
INSTRUCTIONS: Copy and answer the following problems. Incomplete solutions will
not be credited. Work independently. (USE THE ATTACHED ANSWER SHEET)
Elaborate Activity
1. Cite a market situation about Perfect Competition.

2. Cite a market situation about Monopoly.
3. Cite a market situation about Oligopoly.
Evaluate Activity
4. The selling price of a TV set is double that of its net cost. If the TV set is sold to a
customer at a profit of 25% of the net cost, how much discount was given to the
customer?
5. A bookstore purchased a bestselling book at P 200.00 per copy. At what price should
this book be sold so that by giving a 20% discount, the profit is 30%?
6. A man would like to invest P 50,000 in government bonds and stocks that will give an
overall annual return of about 5%. The money to be invested in government bonds will
give an annual return of 4.5% and the stocks of about 6%. The investments are in units
of P 100.00 each. If he desires to keep his stock investment to minimum in order to
reduce his risk, determine how many government bonds and how many stocks should he
purchase.
7. A fixed capital investment of P 10,000,000 is required for a proposed manufacturing
plant and an estimated working capital of P 2,000,000. Annual depreciation is estimated
to be 10% of the fixed capital investment. Determine the rate of return on the total
investment if the annual profit is P 2,500,000.
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UNIVERSITY OF LA SALETTE,INC

COLLEGE OF ENGINEERING AND ARCHITECTURE

Module 1: Basic Economic Environment and Concept

Alfred Marshall (1842-1924), an English professor of political economy at Cambridge

Money can fulfill the following functions:

What is Engineering Economics?

Topic 2: Economic Environment

Consumer and Producer Goods and Services

Necessities and Luxuries

Competition, Monopoly and Oligopoly

Perfect competition occurs in a situation where a commodity or service is supplied by a number of

The Law of Supply and Demand

The Law of Supply and Demand may be stated as follows:

This figure illustrates the price - supply – demand relationship,

When there is additional supply without an

When there is additional demand without an

Topic 3: Present Economy

Let t = maximum production time per unit

7 ℎ𝑜𝑢𝑟𝑠 5 𝑑𝑎𝑦𝑠 1 𝑤𝑒𝑒𝑘

Let x = original cost of a dozen of balut

Cost + profit = 5 cost + profit = 5

Let y = new cost of a dozen of balut

Park, C. S. (2012). Fundamentals of Engineering Economics. Chan S. Park. Pearson Education.

1. Cite a market situation about Perfect Competition.

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