Engineering

Economics
Introduction
Definition of Terms
Principles of Engineering Economics
Engineering Economics and Design Processes
Cost Concept for Decision Making
Present Economic Studies
Definition of Terms
Economics
A science which deals with the attainment of the maximum
fulfilment of society’s unlimited demand for goods and services.

Engineering Economics
A branch of economics which deals with the application of
economic laws and theories involving engineering and technical
projects or equipment.
Engineering economy
Involves formulating, estimating, and evaluating the expected
economic outcomes of alternatives designed to accomplish a
defined purpose. Mathematical techniques simplify the
economic evaluation of alternatives.
Consumer Goods and Services
Products or services that are directly used by people to satisfy
their wants. Examples are food, shelter or home, and clothing.

Producer Goods and Services

Products or services that are used to produce consumer goods
and services. Examples are buildings, machines and factories.
Utility
The satisfaction or pleasure derived from the consumer goods
and services.

Luxury Products
Products that have an income-elasticity of demand greater than
one
Law of Diminishing Utility
An increase in the quantity of any good consumed or acquired by an
individual will decrease the amount of satisfaction derived from that
good.

Law of Diminishing Returns

When one of the factors of production is fixed in quantity or it is
difficult to increase, increasing the other factors of production will
result in a less proportionate increase in output
Supply
The amount of goods or products that are available for sale by
the suppliers.

Demand
The want or desire or need for a product using money to
purchase it.
Law of Supply
The supply of the commodity varies directly as the price of the
commodity, though not proportionately.

Law of Demand
The demand for a commodity varies inversely as the price of the
commodity, though not proportionately.
Law of Supply and Demand
When free competition exists, the price of the product will be
that value where supply is equal to the demand.
Market
A place where the vendors or the sellers and the vendees or the
buyers come together.

Price
The amount of money or its equivalent which is given in
exchange for a good or service.
Tangible Factors
Those which can be expressed in terms of monetary values.

Intangible Factors
Also called as irreducible factors. Those which are difficult or
impossible to express definitely in terms of monetary values.
Tangible Factors
Those which can be expressed in terms of monetary values.

Intangible Factors
Also called as irreducible factors. Those which are difficult or
impossible to express definitely in terms of monetary values.
Competition
Form of a market structure where the number of suppliers is
used to determine the type of the market.

Perfect Competition
Market situation wherein the given product is supplied by a large
number of vendors and there is no restriction of any additional
vendor from entering the market.
Different Market Situations
Market Situation Sellers Buyers
Perfect Competition many many
Monopoly one many
Monopsony many one
Bilateral Monopoly one one
Duopoly two many
Duopsony many two
Oligopoly few many
Oligopsony many few
Bilateral Oligopoly few few
Elements of Engineering
Economy Study

1. Problem Identification
2. Definition of the Objective
3. Cash Flow Estimation
4. Financial Analysis
5. Decision Making
Steps in Engineering
Economy Study
1. Identify and understand the problem; identify the objective
of the project.
2. Collect relevant, available data and define viable solution
alternatives.
3. Make realistic cash flow estimates.
4. Identify an economic measure of worth criterion for decision
making.
Steps in Engineering
Economy Study
5. Evaluate each alternative; consider noneconomic factors; use
sensitivity analysis as needed.
6. Select the best alternative
7. Implement the solution and monitor the results.
Steps in Engineering Economy Study
Present Economy Study
A study that involves the analysis of problems for
manufacturing a product or rendering a service based on
present or immediate costs. Present economy studies usually
occur when the effects on time such as interest and
depreciation are negligible.
Occurrence/Uses of Present
Economy Studies
1. Selection of materials- The cost of materials and their processing
are taken into account.
2. Selection of methods to be used – The present economy studies
reduces to determining the most economical among different
methods.
3. Selection of design – In the design of packages for goods
sold in the market, the manufacturer will always select that one
which he believes has the best appeal to the buying public.
Occurrence/Uses of Present
Economy Studies
4. Selection of site location for a project- In the choice of a
factory site, many factors are to be considered, among
which are the cost of the land, the construction cost at the
different possible sites, the availability of skilled labor and
many other factors. E.g. Dam, and highway. Hauling.
5. Comparison of proficiency among workers- Where the
proficiencies of workers can be translated into monetary
values, efficient and diligent workers are paid higher wages.
Occurrence/Uses of Present
Economy Studies
6. Economy of tool and equipment maintenance- In many
activities, tools have to be sharpened from time to time,
and equipment have to be kept in optimum operating
condition all the time.
7. Economy of number of workers- In many industrial
operations, it is observed that a certain number of workers
cooperating on a specific phase of the work will lead to the
highest productivity.
Example
A machined part to be machined may be made either from an
alloy of aluminum or steel. There is an order for 8,000 units. Steel
costs P3.80 per kg, while aluminum costs P8.70 per kg. If steel is
used, the steel per unit weighs 110 grams; for aluminum P30
grams. When steel is used, 50 units can be produced per hour.
For aluminum, 80 units per hour with the aid of tool costing P640,
which will be useless after the 8000 units are finished. The cost of
the machine and operator is P10.80 per hour. If all other cost are
identical, determine which material will be more economical?
Answer
Aluminum-P3808
Steel-P5072
Selection of Method
The ore of a gold mine in the Mountain Province contains,
on the average, 0.5 gram of gold per ton. One method of
processing costs P1650 per ton and recovers 93% of the
gold, while another method costs only P1500 per ton and
recovers 81% of the gold. If gold can be sold at P8500 per
gram, which method is better and by how much?
Answer.
First Method-P2302.50
Second Method-P1942.50,
by P360.
Utilization of Personnel
 Aman decided to paint his house himself after office hours. He
can plant can paint 25 sq. m. per hour on average. It takes him
15 minutes to prepare his materials and 20 minutes to keep the
materials after painting. If there are 900 sq. m. to be painted,
how long will it take him to paint his house if he devotes hours
each day?
Answer.
18.8, say 19 days.
A jewelry craftsman needs 100 grams of gold alloy containing
75% pure gold for his products. Only two alloys of gold are
available from Davao supplier, the first 80% pure gold and the
other 60% pure gold. How many grams of each gold alloy must
he buy to suit his requirement?