Engineering is a profession in which the mathematical and natural sciences are used with

judgment to create methods for economically using the resources and forces of nature for the
benefit of mankind
Economics focuses on how finite resources are used to satisfy unsatisfied
human desires.
What are these resources? Land, Labor, Capital.
Capital has three (3) Areas:
a. Real Capital (Physical Capital) - are tools, buildings, machinery - things
which have been produced and are used in further production.
b. Financial Capital –assets and money which are used in the production
process.
c. Human Capital - education and training applied to labor in the production
process.
Engineering Economy is a way to make decisions about money for engineering
systems.
PRINCIPLES OF ENGINEERING ECONOMICS
1. Develop the Alternatives- Then the choice or decision is among alternatives.
The alternatives to be identified and then defined for subsequent analysis.
2. Focus on the Differences- Only the differences in expected future outcome among the
alternatives are relevant to the in comparison and should be considered in the decision.
3. Use a Consistent Viewpoint- The prospective outcome of the alternatives, economic and
other should be consistently developed from a defined viewpoint or perspective.
4. Use a Common Unit of Measure- Using a common unit of measurement to enumerate as
many of the prospective outcomes as possible will simplify the analysis of the alternatives.
5. Consider All Relevant Criteria- The decision process should considerable both the
outcome enumerated in the monetary unit and those expressed in some other units of
measurement or made explicit in a descriptive manner.
6. Make Uncertainty Explicit- Risk and uncertainty are inherent in estimating the future
outcomes of the alternatives and should be recognized in their analysis and comparison.
7. Revisit your Decisions-Improved decision making results from an adaptive process; to the
extent practicable, the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved.
BASIC TERMS
1. Tangible Factors- are those which can be expressed in terms of monetary values
2. Intangible Factors- are those which are difficult or impossible to express definitely in
terms of monetary values.
3. Perfect Competition- occurs a certain product is offered for sale by many vendors or
suppliers, and there is no restriction against other vendors from entering the market.
4. Monopoly- the opposite of perfect competition. Occurs when a unique product or service
is available only from a single supplier and entry of all other possible suppliers is prevented.
5. Oligopoly- occurs when there are few suppliers and any action taken by anyone of them
will definitely affect the course of action of the others.
6. Price and Production- if prices go up, production will increase. If the price decrease,
production will also decrease or cease.
7. Local and National Market- defined to be a place where sellers and buyers come
together either. Goods exported to other countries are said to have a world market.
8. Consumer and Producer Goods- Consumer goods are those that are consumed or used
directly by people or are things and services which serve to satisfy human needs. Producer
goods are those which produce goods and services for human consumption
such as tools and ships.
9. Demand- is the quantity of a certain commodity that is bought at a certain price at a given
place and time.
10. Law of Demand- “states that the demand for a commodity varies inversely as the price
of the commodity, though not proportionately.”
11. Elastic Demand- occurs when a decrease in selling price will cause a greater than
proportionate increase in the volume of sales. Goods which are considered luxuries are said to
have elastic demand, because as small decrease in cost will usually result in a big increase in
sales.
12. Utility and Demand- Utility is defined to be capacity of a commodity to satisfy human
want. If the utility of a certain good to a certain individual is great, his demand for that
good will be great. However, if certain good has very small utility the demand will likewise
be small. Hence, the demand for a certain good varies directly as the utility.
13. Law of Diminishing Utility- An increase in the quantity of any good consumed or
acquired by an individual will increase the amount of satisfaction derived from that good.
14. Marginal Utility- is the utility of the last unit of the same commodity which is consumed
or acquired. The last unit of similar commodities or acquired is called the marginal unit.
15. Supply- is the quantity of a certain commodity is offered for sale at a certain price at a
given place and time.
16. Law of Supply- “states that the supply of a commodity varies directly as the price of the
commodity, though not proportionately.”
17. Law of Supply and Demand- the law may be stated, “When free competition exists, the
price of a product will be that value where supply is equal to the demand.”
18. Law of Diminishing Returns- states that “When one of the factors of production is fixed
in quantity or is difficult to increase, increasing the other factors of production will result in a
less than proportionate increase in output.
Decision – a choice made from available alternatives
Decision Making- process of identifying problems and opportunities and resolving them.
The term engineering economic decision refers to all investment decisions
relating to engineering projects.
BASIC DECISION
1. Routine decision- decisions that are to carry out the day-to-day activities.
2. Group decisions- are taken by a group of persons.
3. Individual decision- the decision is taken by one person.
4. Policy decision- is made at top levels. These decisions are taken to determine the basic
policies and goals of the organization.
5. Operating decisions- are taken to executive the policy decisions. These decisions are
taken at middle and lower management levels and are related to the routine activities
of a business.
6. Organizational decisions- are made by the executive in his/her capacity as a manager
in order to achieve the best interest of the organization. This decision can be delegated
to other members of the organization.
Example: adoption of strategies, framing on objectives, etc.
7. Personal decision- by the manager's personal capacity. This decision is not delegated.
Executive personal work
Example: Leave, medical surrender, etc.
8. Major decision- the decision with regard to the quality of the product, price of the
product and development a new product
Factors of Decision Making
Certainty
 All the information the decision-maker needs is fully available
Risk
 Decision has clear-cut goals
 Good information is available
 Future outcomes associated with each alternative are subject to change
Uncertainty
 Managers know which goals they wish to achieve
 Information about alternatives and future events is incomplete
 Managers may have to come up with creative approaches to alternatives
Ambiguity
 By far the most difficult decision situation
 Goals to be achieved or the problem to be solved is unclear
 Alternatives are difficult to define
 Information about outcomes in unavailable
Process of Decision-Making.
1. Identifying the problem- recognizing problem-formulating the problem clearly and
completely.
2. Analyzing the problem- collection and classification of objectives or goals
3. Developing alternative solutions for the problem- sound decision- collect and identify
limited factors.
4. Evaluating the alternative- choose the best one or identify
5. Deciding the best course of action- the manager takes into account the economic risk
factor, the limitation of resources feasibility of its implementation, etc., past experience,
experimentation, and research and analysis. (select the decision to use)
6. Conversion of decision into actions- converted action, implement, and
communication, develop procedure.
Engineering economic decision" refers to all investment decisions relating to
engineering projects.
Time Value of Money (TVM) is the idea that money available at the present time
is worth more than the same amount in the future due to its potential earning capacity.
Interest is the amount of money paid for the use of borrowed capital.
The principal is the amount of money borrowed and on which interest is charged.
The rate of Interest is the amount earned by one unit of principal during a unit of time.
Exact Simple Interest- is based on the exact number of days in a given year. An
ordinary or normal year has 365 days while leap year (which occurs once every 4
years) has 366 days.
Compound Interest, the interest earned by the principal is not paid at the end of each
interest period, but is considered as added to the principal and therefore will also earn interest
for the succeeding periods.

Annuity (A) is defined as a series of equal payments “A” occurring at equal intervals of time.
When an annuity has a fixed time span, it is known as annuity certain.
Classification of Annuity:
1. Simple annuity- payment period is the same as the interest period. If the payments are
made monthly then the conversion of money also occurs monthly.
2. General annuity- payment period is not the same as the interest period however it can be
converted to a simple annuity by making the payment period the same as the compounding
period by the concept of effective rates.
Types of Annuities:
1. Ordinary annuity- one where equal payments is made at the end of each payment period
starting from the first period.
From the cash flow diagram above, the future amount F is the sum of payments
starting from the end of the first period to the end of the n th period. Observe that
the total number of payments is n and the total number of compounding periods is
also n. Thus, the ordinary annuity, the number of payments and, the number of
compounding periods are equal.
2. Annuity due- In annuity due, equal payments are made at the beginning of each
compounding period starting from the first period. The diagram below shows the cash flow in
an annuity due.
Rate of discount- is the discount on one unit of principal per unit time.
3. eferred annuity- is one where the payment of the first amount is deferred a certain number
of periods after the first.
A. Accumulation Stage. A single payment is allowed to earn interest for a specified duration.
There are no annuity payments during this period of time, which is commonly referred to as
the period of deferral.
B. Payments Stage. The annuity takes the form of any of the four annuity types and starts at
the beginning of this stage as per the financial contract.
4. Perpetuity or Perpetual Annuity- annuity where the payment periods extend to forever or in
which the periodic payments continue indefinitely.