Life is not a
series of
chances
its a series
Beth Flores, DZAS
Basic Concepts of
Economics
What is Economics?
Economics is a science that deals with the
attainment of the maximum fulfilment of
societys unlimited demands for goods and
services
What is Engineering Economics?
Engineering Economics is the branch of
economics that deals with the application
of the laws and theories of economics to
engineering and technical projects
What are Consumer and Producers
Goods and Services?
Consumer goods and services refer the
products or services that are directly used
by people to satisfy their wants. Examples
are food, clothing, shelter or home, etc.
What are Consumer and Producers
Goods and Services?
Producer goods and services are those
that are used to produce the consumer
goods and services
What is the difference between Necessity
and Luxury?
Necessity refers to the goods and services
that are required to support human life,
needs and activities.
What is the difference between Necessity
and Luxury?
Necessity product or staple product is
defined as any product that has incomeelasticity of demand less than one. This
means that as income rises,
proportionately less income is spent on
such products. Examples include basic
foodstuff like bread and rice, clothing, etc.
What is the difference between Necessity
and Luxury?
Luxuries are those goods and services that
are desired by human and will be acquired
only after all the necessities have been
satisfied.
What is the difference between Necessity
and Luxury?
Luxury product is defined as any product
that has income-elasticity of demand
greater than one. This means that as
income rises, proportionately more income
is spent on such products. Examples
include consumer durables like
appliances, expensive cars, holidays and
entertainment, etc.
What are the different market
situations?
The term market refers to the exchange
mechanism that brings together the sellers
and the buyers of a product, factor of
production or financial security. It may
also refer to the place or area in which
buyers and sellers exchange a welldefined commodity.
What are the different market
situations?
Buyer or consumer is defined as the basic
consuming or demanding unit of a
commodity. It may be an individual
purchaser of a good or service, a
household (a group of individuals who
make joint purchasing decisions), or a
government.
What are the different market
situations?
Seller is defined as an entity which makes
products, goods or services available to
buyer or consumer in exchange of
monetary consideration.
What are the 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
What are the different market
situations?
Perfect competition refers to the market
situation in which any given product is
supplied by a very large number of
vendors and there is no restriction against
additional vendors from entering the
market.
What are the different market
situations?
Perfect competition is characterized by the
following:
A. Many sellers and many buyers
B. Homogeneous products
C. Free market entry and exit
D. Perfect information
E. Absence of all economic friction
What are the different market
situations?
Monopoly is the opposite of perfect
competition. This market is characterized
by the following:
A. One seller and many buyers
B. Lack of substitute products
C. Blockaded entry
What are the different market
situations?
Natural Monopoly is a market situation
where economies of scales are so
significant that costs are only minimized
when the entire output of an industry is
supplied by a single producer so that
supply costs are lower under monopoly
than under perfect competition and
oligopoly.
What are the different market
situations?
Oligopoly exists when there are so few suppliers of a
product or service that the action of one will
inevitably result in a similar action by the other
suppliers. This type of market is characterized by the
following:
A. Few sellers and many buyers
B. Homogeneous of differentiated products
C. Difficult market entry
What is a Demand?
Demand is the need, want or desire for a
product backed by the money to purchase
it. In economic analysis, demand is
always based on willingness and ability
to pay for a product, not merely want or
need for the product.
What is a Demand?
The demand for a product is inversely
proportional to the selling price. As the
selling price is increased, there will be less
demand for the product and as the selling
price is decreased, the demand will
increase.
What is a Supply?
Supply is the amount of product made available for
sale.
If the selling price for a product is high, more
producers will be willing to work harder and risk
more capital in order to reap more profit. However, if
the selling price of the product declines, capitalists
will not produce as much because of the smaller
profit they can obtain for their labor and risk.
What is a Supply?
Therefore the relationship between price
and supply is that they are directly
proportional. The bigger the selling price,
the more the supply, and the smaller the
selling price, the less the supply.
What is the Law of Supply and Demand?
The Law of Supply and Demand is stated
as follows:
Under conditions of perfect competition,
the price at which the given product will
be supplied and purchased is the price that
will result in the supply and the demand
being equal.
Introduction to
Engineering
Economy
ORIGIN OF ENGINEERING
ECONOMY
Arthur Mellen Wellington or known as A.M
Wellington was a railway civil engineer of his
time. He became famous because of his book
entitled The Economic Theory of the
Location of Railways which was published by
John Wiley and Sons in 1887. The book was
subtitled as an analysis of the conditions
controlling the laying out of railways to effect
the most judicious use of capital. Wellington
was later known as the Father of
Engineering Economy.
Source:
http://mysite.du.edu/~jcalvert/railway/wellingt.htm
Definition of Engineering
Economy
Engineering,
as
defined
by
the
Accreditation Board for Engineering
Technology is the profession in which
a knowledge of the mathematical
and natural sciences gained by
study, experience, and practice is
applied with judgement to develop
ways to utilize, economically the
materials and forces of nature for
theSullivan,
benefit
of
Source:
William G.,
Elin mankind.
M. Wicks and James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall. p2
Definition of Engineering
Economy
Engineering Economy involves the systematic
evaluation of the economic merits of proposed
solutions
to
engineering
problems.
To
be
economically acceptable, solutions to engineering
problems must demonstrate a positive balance of
long-term benefits over long-term costs, and they
must also
Promote the
organization
Embody creative and innovative technology and
ideas
Permit identification and scrutiny of their
Source: Sullivan, outcomes
William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING
estimated
well-being
ECONOMY, 13TH ED. Pearson-Prentice Hall. p3
and
survival
of
the
Translate profitability to the bottom line through
a valid and acceptable measure of merit.
Definition of Engineering
Economy
Engineering Economy is the dollars-and-cents
side of the decisions that engineers make or
recommend as they work to position a firm to
be profitable
in a highly competitive
marketplace.
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING
ECONOMY, 13TH ED. Pearson-Prentice Hall. p3
Definition of Engineering
Economy
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
alternative.
Source: Blank, L. and Tarquin, A. (2012). ENGINEERING
ECONOMY, 7TH ED. McGraw Hill. P3
Principles of Engineering
Economy
#1: DEVELOP ALTERNATIVES
A decision situation involves making a choice
among two or more alternatives. Developing
and defining the alternatives for detailed
evaluation is important because of the
resulting impact on the quality of the
decision.
Creativity and innovation are essential to the
process.
One alternative that may be feasible in a
decision situation is making no change to the
Source: Sullivan, William G., Elin M. Wicks and James T.
current operation or set of conditions. TH
Luxhoj. (2006). ENGINEERING
Pearson-Prentice Hall. p4-6
ECONOMY,
13
ED.
Principles of Engineering
Economy
#2:
FOCUS
DIFFERENCES
ON
THE
Only the differences in the future outcomes
of the alternatives are important. Outcomes
that are common to all alternatives can be
disregarded in the comparison and decision.
The principle focuses on the engineering
economic analysis of recommending a future
course of action based on the differences
among feasible alternatives.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Principles of Engineering
Economy
#3: USE A CONSTANT VIEWPOINT
The prospective outcomes of the alternatives,
economic and other, should be consistently
developed from a defined viewpoint or perspective.
The perspective of the decision maker, which is
often that of the owners of the firm, would normally
be used. However, it is important that the viewpoint
for the particular decision be first defined and then
used consistently in the description, analysis, and
comparison of the alternatives.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Principles of Engineering
Economy
#4: USE A COMMON UNIT OF
MEASURE
Using a common unit of measurement to
enumerate as many of the prospective
outcomes as possible will simplify the
analysis of the alternatives.
It is desirable to make as many prospective
outcomes as possible commensurable.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Principles of Engineering
Economy
#5: CONSIDER
CRITERIA
ALL
RELEVANT
Selection of a preferred alternative requires the use of
a criterion. The decision process should consider both
the outcomes enumerated in the monetary unit and
those expressed in some other unit of measurement
or made explicit in a descriptive manner.
The decision maker will normally select the alternative
that will best serve the long-term interests of the
owners of the organization.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Principles of Engineering
Economy
#6:
MAKE
RISK
AND
UNCERTAINTY EXPLICIT
Risks and uncertainty are inherent in
estimating the future outcomes of the
alternatives and should be recognized in
their analysis and comparison.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Principles of Engineering
Economy
#7:
REVISIT
DECISIONS
YOUR
A good decision-making process can result in
a decision that has an undesirable outcome.
Other decisions, even though relatively
successful, will have results significantly
different from the initial estimates of the
consequences.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Engineering Economy and
Design Process
An
engineering
economy
study
is
accomplished using a structured procedure
and mathematical modelling techniques. The
economic results are the used in a decision
situation that normally includes other
engineering knowledge and input.
A sound engineering economic analysis
procedure incorporates the basic principles
(7 principles) and involves several steps.
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Engineering Economy and
Design Process
Source: Sullivan, William G., Elin M. Wicks and James T.
Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p4-6
Application of Engineering Economic Procedure
Sheila bought a small apartment
building for $100,000 in a college
town. She spent $10,000 of her own
money for the building and obtained a
mortgage from a local bank for the
remaining
$90,000.
The
annual
mortgage payment to the bank is
$10,500. Sheila also expects that
annual maintenance on the building
and grounds will be $15,000. There
are four apartments each with two
Source: Sullivan, William G., Elin M. Wicks and James T.
bedrooms
in ENGINEERING
the building
can
Luxhoj. (2006).
ECONOMY, that
13
ED.
Pearson-Prentice
Hall. p13
each
be rented
for $360 per month.
TH
Application of Engineering Economic Procedure
a.Does Sheila have a problem?
b.What are her alternatives? Identify at
least three.
c. Estimate the economic consequences and
other required data for the alternative in
part b.
d.Select criterion for discriminating among
alternatives and use it to advise Sheila on
which course of action to pursue.
e.Attempt to analyze and compare the
alternatives in view of at least one
criterion in addition to cost.
Source: Sullivan, William G., Elin M. Wicks and James T.
f. What
Sheila do
based13TH
on ED.the
Luxhoj. should
(2006). ENGINEERING
ECONOMY,
information
have generated?
Pearson-Prentice you
Hall. p13
