Engineering Economics required necessities have been obtained.

E.g. Designer Bags, Jewelries

Prof. Engr. Renz Michael Magat
Shawn L. Estera Demand and Supply
 Demand is the amount of the good or
Module 01:
service that customers want to buy. The
This course deals with the study of concepts quantity of a certain commodity that is
of the time value of money and equivalence; bought at a certain price at a given place
basic economic study methods; decision and time.
under certainty; decision recognizing risk;  Supply is the amount of a specific good or
and decisions admitting uncertainty. service that's available in the market.

The law of demand holds that demand for a
Engineering Economics
product
 Engineering economy is the analysis changes
and evaluation of the factors that will affect inversely to
the economic success of engineering its price, all
projects to the end that a recommendation else being
can be made which will insure the best equal. In
use of capital; other words,
the higher
the price,
the lower
the level of
demand.
The law of supply relates price changes for a
product with the quantity supplied. In contrast with
the law of
demand the
law of supply
relationship
is direct, not
inverse. The
higher the
price, the
Goods and Services higher the
quantity
 Consumer goods and services are those supplied.
products or services that are directly used
by people to satisfy their wants.
 Producer goods and services are used to Equilibrium Price, also called a market-clearing
produce consumer goods and services or price, is the price at which demand matches
other producer goods. supply, producing a market equilibrium
acceptable to buyers and sellers.
Necessities and Luxuries
 Necessities are those products or
services that are required to support
human life and activities.
E.g. Food, Water, Shelter
 Luxuries are those products or services
that are desired by humans and will be
purchased if money is available after the
Market Cash Flow Diagrams (Example)
 Perfect Competition occurs in a situation  View of Lender
where a commodity or service is supplied
by a number of vendors and there is ₱ 150
nothing to prevent additional vendors
Cash Inflow
entering the market. ₱ 100
Cash Outflow
 Monopoly is the opposite of perfect
competition. A perfect monopoly exists
when a unique product or service is  View of Borrower
available from a single vendor and that
vendor can prevent the entry of all others
into the market. ₱ 100

 Oligopoly exists when there are so few

Cash Inflow
suppliers of a product or service that ₱ 150
action by one will almost inevitably result Cash Outflow
in similar actions by the others.

Law of Diminishing Returns Simple Interests

“When the use of one of the factors of  Simple interests is calculated using the
production is limited, either in increasing principal only, ignoring any interests that
cost or by absolute quantity, a point will be had been accrued in preceding periods.
reached beyond which an increase in the
variable factors will result in a less than
proportionate increase in output.” I = Pin I – interest
F=P+I P – principal or present worth
F = P (1 + in) n – number of interests periods
i – rate of interests
F – future worth

Simple Interest:
10%

1000 1100 1200

Compound Interest:
10%

Interests 1100 1210

1000
 Interest is the amount of money paid for
the use of borrowed capital or the income
produced by money which has been Ordinary Simple Interests
loaned. Mathematically, it is the difference
 Ordinary simple interests is computed
between an ending amount of money and
on the basis of 12 months of 30 days or
the beginning amount.
360 days a year.

Exact Simple Interests

 Exact simple interests is based on the
exact number of days in a year, 365 days
in ordinary year and 366 for a leap year.
 When interest paid over a specific time
unit is expressed as a percentage of the Leap Year = divisible by 4
principal, it is called the interest rate. Century Year = divisible by 400
Compound Interests F=Pe
rn

Compounded Continuously
 In calculations of compound interest, the
interests for an interest period is 12
calculated on the principal plus total
10
amount of interest accumulated in
previous period.
8

F=P+ I 6
F=P(1+i)ⁿ
4
 The quantity (1+i)n is commonly called the
“single payment compound amount factor” 2
and is designated by the functional symbol
F/P, i%, n 0

F=P ( FP ,i % , n)
Interest Rates
 Nominal rate of interest specifies the Annual : m=1
rate of interest and a number of interest Semi-Annual : m=2
r Quarterly : m=4
periods in one year. i= Monthly : m=12
m
Days : m=365
i – rate of interests per interest period
r – nominal interest rate
m – number of compounding periods per year

 Effective rate of interest is the actual

interest or exact rate of interest on the
principal during one year.

Effective rate= 1+ ( ) r m
m
−1

i – rate of interests per interest period

r – nominal interest rate
m – number of compounding periods per year

Compounding
 In discrete compounding, the interest is
compounded at the end of each finite –
length period, such as month, a quarter or
a year.

( )
nm
r
F=P 1+
m
 In continuous compounding, it is
assumed that cash payments occur once
per year, but the compounding is
continuous throughout the year.