CHAPTER 1: INTRODUCTION OF ENGINEERING
ECONOMICS to a specific output or work activity.
 DEFINITIONS
 Economics
- The study or science of the production,
distribution and consumption of goods and
services.
 Economy
- The cost or profit situation regarding a
practical enterprise or project, as in economy
studies, engineering economy, project
economy.
 Engineering Economy
- The discipline concerned with economic
aspects of engineering; it involves the
systematic evaluation of the costs and
benefits of proposed technical projects
- The application of engineering or
mathematical analysis and synthesis to
economic decisions.
- A body of knowledge and concerned with the
evaluation of the worth of commodities and
services.
- The economic analysis of engineering
alternatives.
 COST TERMINOLOGY
 Fixed Costs
- Those unaffected by changes in activity level
over a feasible range of operations for the
capacity or capability available.
 Variable Costs
- Those associated with an operation that
varies in total with the quantity of output or
other measures of activity level.
 Incremental Costs
- Also called as incremental revenue. It is the
additional cost, or revenue, that results from
increasing the output of a system by one (or
more) units.
 Recurring Costs
- Those that are repetitive and occur when an
organization produces similar goods or
services on a continuing basis.
 Nonrecurring Costs
- Those that are not repetitive, even though
the total expenditure may be cumulative over
a relatively short period of time.
 Direct Costs
- Those that can be reasonably measured and
allocated to a specific output or work activity.
 Indirect Costs
- Those that are difficult to attribute or allocate
 Overhead Costs
- Consists of plant operating costs that are not
direct labor or direct material costs.
 Standard Costs
- Are representative costs per unit of unit of
output that are established in advance of
actual production or service delivery
 Cash Costs
- A cost that involves payment of cash.
 Book Costs
- Refers to those expenses which do not
involve actual cash payments
 Sunk Costs
- One that has occurred in the past and has no
relevance to estimates of future costs and
revenues related to an alternative course of
action.
 Life-Cycle Costs
- this term refers to a summation of all costs,
recurring and nonrecurring, related to a
product, structure, system, or service during
its life span.
 PRINCIPLES OF ENGINEERING ECONOMY
1. Develop the alternatives
2. Focus on the differences
3. Hold same view point
4. Use common units of measure
5. Use all relevant criteria
6. Make uncertainty very explicit
7. Review or revisit your decisions
 ENGINEERING ECONOMY AND ITS DESIGN
PROCESS
1. Problem definition
2. Problem formulation and evaluation
3. Synthesis of possible solutions
4. Analysis, optimization, and evaluation
5. Specification of preferred alternative
6. Communication
 CHAPTER 2
 INTEREST
 The amount of money earned for the use of
borrowed capital is called interest.
 Borrower’s Point of View:
- Interest is the amount of money paid for the
capital
 Lender’s Point of View:
- Interest is the income generated by the
capital which has lent
 SIMPLE INTEREST
 Only, the original principal bears interest and
the interest to be paid varies directly with time
 COMPOUND INTEREST
 The interest earned by the principal at the end
of each interest period (compounding period)
is added to the principal. The sum (principal +
interest) will earn another interest in the next
compounding period
 Number of Compounding
- Compounded Annually ( m=1)
- Compounded Semi-Annually (m=2)
- Compounded Quarterly (m=4)
- Compounded Semi-Quarterly (m=8)
- Compounded Monthly (m=12)
- Compounded Bi-Monthly (m=6)
- Compounded Daily (m=360)
 CONTINUOUS COMPOUNDING
 Nominal Rate
- Defined as the basic Annual rate of interest
 EFFECTIVE RATE
 Defined as the actual of the exact rate of
interest earned on the principal during a one-
year period
ECONOMIC MARKET STRUCTURE
 PERFECT COMPETITION
 Occurs in a situation in which any given
product supplied by a large number of vendors
and there is no restriction on additional
vendors entering the market. Under such
conditions, there is assurance of complete
freedom on the part of both buyer and seller
 MONOPOLISTIC COMPETITION
 Refers to an imperfectly competitive market
with the traits of both the monopoly and
competitive market. Sellers compete among
themselves and can differentiate their goods in
terms of quality and branding to look different
 MONOPOLY
 A market structure characterized by a single
seller, selling a unique product in the market.
In a monopoly market, the seller faces no
competition, as he is the sole seller of goods
with no close substitute
 OLIGOPOLY
 A market structure wherein a small number of
producers work to restrict output and/or fix
prices so they can achieve above-normal
market returns.