ENGINEERING

ECONOMY
CHAPTER 1
ECONOMICS
• one of the social sciences
which consists of that body of
knowledge dealing with
people and their assets or
resources.
• It is defined as the sum total of
knowledge which treats of the
creation and utilization of
goods and services for the
satisfaction of human wants.
Terminologies
• Economy is a system of human activities related to the production,
distribution, exchange or trade, consumption of limited goods and
services by different agents (individuals, businesses, organization) in a
given geographical location.
• Goods or commodity is defined as any tangible economic product that
contributes directly or indirectly to the satisfaction of human wants.
• Service is defined as any tangible economic activity that contributes
directly or indirectly to satisfy the human wants.
• Money is anything that is generally acceptable as a means of exchange
and at the same time acts as a measure of value.
BASIC TERMS AND
PRINCIPLES OF ECONOMICS
• COMPETITION • NECESSITIES AND
• MONOPOLY LUXURIES
• LOCAL AND NATIONAL • DEMAND
MARKET • OLIGOPOLY
• CONSUMER AND • PRICE AND PRODUCTION
PRODUCER GOODS • SUPPLY
LAW OF DEMAND

• “The demand for a commodity

varies inversely as the price of
the commodity, though not
proportionately.”
LAW OF SUPPLY

• “The supply of a
commodity varies
directly as the price of
the commodity.”
THE LAW OF DIMINISHING RETURNS

• When one of the factors of production is fixed in quantity or is

difficult to increase, increasing the other factors or production will
result in a less than proportionate increase in output.
Engineering Design and Economic Process
Application of Engineering Economics
• Example No. 1. A large electric utility company has proposed building
an ₱ 820 million combined cycle, gas-powered plant to replace the
electric generation capacity at one of its coal-fired facilities. Develop
three other alternatives for replacing this electric generation capacity.

• Solution: There are numerous other options including a nuclear

power plant, a 100% gas-fired plant. Also, solar farms are becoming
more cost competitive nowadays and other renewable sources of
energy like wind energy.
Application of Engineering Economics
• Example No. 2. The management team of Kahoy Inc. is under pressure
to increase profitability to get a much-needed loan from the bank to
purchase a more modern pattern-cutting machine. One proposed
solution is to sell waste wood chips and shavings to a local charcoal
manufacturer instead of just throwing them as solid wastes.
a. Define the company’s problem.
Next, reformulate the problem in a variety of creative ways.
b. Develop at least one potential alternative for your reformulated
problems in Part (a)
Solution
Solution:
a. Kahoy Inc.’s problem appears to be that revenues are not sufficient to cover all operating costs and
expenses. Several reformulations can be posed:
1. The problem is to increase revenues while reducing costs.
2. The problem is to maintain revenues while reducing costs.
3. The problem is an accounting system that provides distorted cost information.
4. The problem is that the new machine is really not needed and hence, there is no need for a bank
loan.

b. Based only on reformulation 1, an alternative is to sell wood chips and shavings as long as increased
revenue exceeds extra expenses. Another alternative is to discontinue the manufacture of specialty
items and concentrate on standardized, high volume products. Yet another alternative is to tie-up with
other small-scale industries in the area involved in providing modern wood pattern-cutting services
For this situation,
a. Define the problem.
b. List key assumptions.
c. List alternatives facing Greenfield Industries.
d. Select a criterion for evaluation of alternatives.
e. Introduce risk into this situation.
f. Discuss how nonmonetary considerations may impact the selection.
Solution
We need to determine which will cost cheaper, the use of steel or the
use of aluminum. Therefore, we need to determine first the cost per
piece for both materials.
Engineering Economy Technique

• The complete analysis of a proposed project involves three basic

steps, according to Bullinger, as follows:
1. The economy analysis
2. The financial analysis
3. The intangible analysis
Economy Analysis
• Considers all factors affecting the economy of the project which can
be used to specific monetary values
• Determines the initial cost of the project
• The cost for operation and maintenance
• The needed working capital
• The probable income the project will generate when operational
• Rate of return on investment
• And all other factors
Financial Analysis
• Determines the methods and sources of financing the project, either
through equity capital or borrowed capital, or combination of both.

• Tries to discover the best methods of financing the project to the

extend of the amount obtained in the economy analysis
Intangible Analysis
• Determines all aspects of the project which cannot be reduced to
monetary values and considers the uncertaity and the risk inherent in
the project

• Includes the so-called judgement factor whose analysis depends upon

the judgement of responsible persons involved in the project.