UNIVERSITY OF SANTO TOMAS

Faculty of Engineering

Department of Mechanical Engineering

ENG2010 – ENGINEERING ECONOMY

INTRODUCTION TO ENGINEERING ECONOMY

ROGELIO O. ALMIRA JR., PME ASEAN ENG.

 DEFINITION OF ENGINEERING ECONOMY

• 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 ensure best use of capital.
 WHY STUDY ENGINEERING ECONOMY

• In manufacturing, engineering is involved in every detail of a product’s production, from

the conceptual design to the shipping.
• Engineers must consider the effective use of capital assets such as building and
machinery.
 WHY STUDY ENGINEERING ECONOMY

• One of the engineer’s primary task is to plan for the acquisition of equipment (capital
expenditure) that will enable the firm to design and produce products economically.
 WHY STUDY ENGINEERING ECONOMY

• For engineers wanting to move into

management or start their own
company, studying economics might
be the answer.
 BASIC TERMINOLOGY FOR ENGINEERING ECONOMY STUDIES

• ALTERNATIVES
The alternatives in engineering considerations usually involve such items as:

• purchase cost (first cost),

• anticipated useful life,
• yearly costs of maintaining assets (annual maintenance and operating costs),
• anticipated resale value (salvage value),
• and the interest rate.
After the facts and all the relevant estimates have been collected, an engineering
economy analysis can be conducted to determine which is best from an economic
point of view.
 BASIC TERMINOLOGY FOR ENGINEERING ECONOMY STUDIES

• CASH FLOWS
The estimated inflows (revenues) and outflows (costs) of money are called cash flows.
These estimates are truly the heart of an engineering economic analysis.

BORROWER LENDER
$1000 $1100
i = 10% i = 10%
$100 $100 $100 $100
INFLOWS
0 1 2 3 4 5
0 1 2 3 4 5

OUTFLOWS
$100 $100 $100 $100
$1000
$1100
 BASIC TERMINOLOGY FOR ENGINEERING ECONOMY STUDIES

• EVALUATION CRITERIA – used to find the “best” alternative.

Alternative with the lowest overall cost or highest overall net
income is selected.
 BASIC TERMINOLOGY FOR ENGINEERING ECONOMY STUDIES

• TIME – VALUE OF MONEY – the change in the amount of

money over a given time period. It is the most important
concept of engineering economy
 BASIC ECONOMIC TERMS

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.

Consumer goods

Food delivery services Customer service

 BASIC ECONOMIC TERMS

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.

Basic necessities

Luxury watch Luxury cars

 BASIC ECONOMIC TERMS

Demand
Demand is the quantity of a certain
commodity that is bought at a certain
price at a given place and time.

Figure 1-1. General price-

demand relationship
 BASIC ECONOMIC TERMS

Elastic demand occurs when a decrease in selling price result in

a greater proportionate increase in sales.

Inelastic demand occurs when a decrease in the selling price

produces a less than proportionate increase in sales.

Figure 1-2. Price-demand

relationship for luxuries and necessities
 BASIC ECONOMIC TERMS

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

Figure 1-3. General price-

supply relationship
 BASIC ECONOMIC TERMS

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 a given product will be supplied
and purchased is the price that will result in the
supply and the demand being equal.”

Figure 1-4. Price-supply-

demand relationship.
 BASIC ECONOMIC TERMS

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. Perfect competition market.
MERALCO for example is a major monopoly.
Consumers have no choice on who they
want to provide service for their electricity.
What happens is MERALCO ends up
charging whatever the they want. You can't
do anything about it since if you complain or
don't pay your bills, they just cut off your
electricity.
 BASIC ECONOMIC TERMS

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.

Oil companies in the Philippines is an example of oligopoly. Oligopoly

is a market condition that exists when there are few sellers, as a
result of which they can greatly influence price and other market
factors.
 BASIC ECONOMIC TERMS

The Law of Diminishing Returns

“When the use of one of the
factors of production is limited, 27
either in increasing cost or by 25
absolute quantity, appoint will be
reached beyond which an 20
increase in the variable factors will
result in a less than proportionate
increase in output.”
10

1 2 3 4

Law of diminishing returns.