1.1.

The Economic Environment

Engineering Economy
It 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
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 or services or
other producers' 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
It is the quantity of a 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 than
proportionate increase in sales.
Inelastic demand occurs when a decrease in a selling price produces a less than
proportionate increase in sales.
Unitary elasticity of demand occurs when a mathematical product of volume and price
is constant.
Competition, Monopoly and Oligopoly
Perfect competition occurs in a situation where a community or service is supplied by
a number of vendors and there is nothing to prevent additional vendors entering the
market.
A 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.
An 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.
Law of Supply and Demand
Supply is the quantity of a certain commodity that is offered for sale at a certain price at
a given place and time.
"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."
This is the graph of the Law of Supply and Demand.

Law of Demand
States that " if all other factors are equal, the higher the price of a good, the less people
demand that goods." In other words, the higher the price the lower the quantity
demanded.
Law of Supply
States that "the higher the price, the higher the quantity supplied"

The Law of Diminishing Returns

"When the use of one of the factors of production is limited, either in increasing 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."
1.2. Simple Interest and Money-
time Relationship
SIMPLE INTEREST
In this module, we will study a simple interest.
Time value of money
It is defined as the time-dependent value of money stemming both from changes in the
purchasing power of money (inflation or deflation) and from the real earning potential of
alternative investment over time

Interest
It is the amount of money paid for the use of borrowed capital or income produced by money
that has been loaned.
Simple interest
Simple interest is calculated using the principal only, ignoring any interest that had been accrued
in preceding periods.
I=Pni
but
F=P+I
F=P+Pni
F = P (1 + n i)
Where
F = future worth or accumulated amount
I = interest
P = principal amount
n = no. of interest period
i = rate of interest per interest period

Types of Interest
a). Ordinary simple interest
It is computed on the basis of 12 months, 30 days each or 360 days per year.
One (1) interest period = 360 days
b). Exact simple interest
It is computed on the basis of exact number of days in a year, 365 days for an ordinary
year, and 366 days for leap year.
One (1) interest period = 365 days or 366 days
1.3. Cash-flow Diagram
▶ CASH-FLOW DIAGRAM

In this module, we will study the cash-flow diagram and compound interest.

Cash-flow Diagram
It is the graphical presentation of each flows drawn on a time scale.
•
o
▪ ↑receipt (positive cash flow or cash inflow)
▪ ↓disbursement (negative cash flow or cash outflow)

To illustrate the above principles please refer to the sample problem below.
Sample Problem no. 5
A loan of P100 at a simple interest of 10% will become P150 after 5 years.
Compound Interest
It is the interest for an interest period is calculated on the principal plus total amount of
interest accumulated in previous periods.
It also means the interest on top of interest.
1.4. Equation of Values
▶ EQUATION OF VALUES
In this module, we will study the equation values.
Equation of Values
An equation of value is obtained by setting the sum of the values on a certain
comparison or focal date of one set of obligations equal to the sum of the values on the
same date of another set of obligations.
In relation to this module, let's watch this video below.
https://youtu.be/lUhjTL5jvj0

Continuous Compounding and Discrete Payments

In discrete compounding, the interest is compounded at the end of each finite-length
period, such as a month, a quarter, or a year.
In continuous compounding, it is assumed that cash payments occur once per year but the
compounding is continuous throughout the year.
1.5. Discount and Inflation
▶ DISCOUNT
In this module, we will study Discount and Inflation.
Discount
Discount on a negotiable paper is the difference between the present worth (the amount received
for the paper in cash) and the worth of the paper at some time in the future(the face value of the
paper or principal).
It is the interest paid in advance.
Discount = Future Worth - Present Worth

The rate of discount is the discount on one unit of principal for one unit of time.
1.6. Summary
▶ SUMMARY
Interest
It is the amount of money paid for the use of borrowed capital or income produced by
money that has been loaned.
Simple interest
Simple interest is calculated using the principal only, ignoring any interest that had been
accrued in preceding periods.
I=Pni
but
F=P+I
F=P+Pni
F = P (1 + n i)
Where
F = future worth or accumulated amount
I = interest
P = principal amount
n = no. of interest period
i = rate of interest per interest period
Types of Interest
a). Ordinary simple interest
It is computed on the basis of 12 months, 30 days each, or 360 days per year.
One (1) interest period = 360 days
b). Exact simple interest
It is computed on the basis of the exact number of days in a year, 365 days for an
ordinary year, and 366 days for leap year.
One (1) interest period = 365 days or 366 days
Equation of Values
An equation of value is obtained by setting the sum of the values on a certain
comparison or focal date of one set of obligations equal to the sum of the values on the
same date of another set of obligations.