ECON Notes • economics deals with theories of

choice.
Chapter ONE

Basic concepts of Engineering Economics

Economics Basics: Demand and Supply
Engineering Economy
Supply and Demand
• evaluates the monetary consequences of
the products, projects, and processes • is perhaps one of the most fundamental
that engineers design. concepts of economics and it is the
backbone of a market economy.
Time Value of Money
Demand
• the principle today is more valuable than
• refers to how much (quantity) of a
a year in the future.
product or service is desired by buyers.
• it can be explained through the earning
• the quantity demanded is the amount of
power of money
a product people are willing to buy at a
Economics certain price; the relationship between
price and quantity demanded is known
• deal with a central problem faced by all as the demand relationship.
individuals and all societies: the problem
Supply
of Scarcity.

The problem of scarcity • represents how much the market can

offer.
• means that every time we take an • the quantity supplied refers to the
economic decision, we face some amount of a certain good producers are
constraints that affect our decision. willing to supply when receiving a certain
price.
“Economics is the study of choices
(economic choices) in the face of • the correlation between price and how
scarcity of resources.” much of a
good or service is supplied to the market is
Scarcity known as the supply relationship.

• arises because “resources” that are used

to produce and consume goods are Market economy theories - demand and
limited by physical space. supply theory will allocate resources in the most
efficient way possible.
• For example, to produce goods and
services we need to use productive The law of demand and the law of supply.
resources like Labour, Land and Raw
Materials, Capital (machines, factories, Law of Demand
equipment, etc. etc.).
 if all other factors remain equal, the
*Therefore, economists tend to define scarcity higher the price of a good, the
in the following way: less people will demand that good.
Definition of Scarcity: the excess of human  In other words, the higher the price, the
needs over what can actually be produced. lower the quantity demanded.

Trade-off

• is one of the core principles in

economics.
• in economics a trade-off implies that
having more of one thing usually it
implies having less of another.

Definition of Economics: economics is the

study of choices under conditions of scarcity, or
the study of choice with constraints.
Law of Supply

 demonstrates the quantities that will

be sold at a certain price.
 means that the higher the price, the
higher the quantity supplied.
 Producers supply more at a higher price
because selling a higher quantity at
higher price increases revenue.

Market Equilibrium

 when supply and demand are equal

(i.e. when the supply function and
demand function intersect) the
economy is said to be at equilibrium.
The decision-making process
 the allocation of goods is at its most
efficient because the amount of goods Real-world decision-making processes usually
being supplied is exactly the same as are and should be nonlinear, with numerous
the amount of goods being demanded. feedback loops.
 equilibrium occurs at the intersection
of the demand and supply curve,
which indicates no allocative
inefficiency.

linear flow chart in fig 1.3 is most useful to define the steps
for decision making.

Types of Strategic Engineering Economic

Surplus Decisions

 a situation in which the quantity

supplied is greater than the
quantity demanded. Service or Quality Improvement

Shortage  Investments in this category include

any activities to support the
 a situation in which the quantity improvement of productivity.
demanded is greater than the
quantity supplied.
  Quality, and customer satisfaction in the Principle 1: A nearby dollar is worth more
service sector, such as in the financial, than a distant dollar
healthcare, and retail industries.
 fundamental concept in engineering
New Products or Product Expansion economics is that money has a time
value associated with it.
 Investments in this category are those that
increase the revenues of a company if  we can earn interest on money received
output is increased. today it is better to receive money earlier
than later.
Two common types of expansion  this concept will be the basic foundation for
decision all engineering project evaluation.

• First type includes decisions about Principle 2: All that counts is the
expenditures to increase the output of differences among alternatives.
existing production or distribution facilities.
• Second type of decision problem  it should be based on the differences
includes the consideration of among alternatives considered.
expenditures necessary to produce a new  all that is common is irrelevant to the
product or to expand into a new decision.
geographic area.  any economic decision is no better than the
alternatives being considered. Therefore,
an economic decision should be based on
Equipment and Process Selection
the objective of making the best use of
limited resources.
 it involves selecting the best course of
action when there are several ways to Principle 3: Marginal revenue must exceed
meet a project's requirements. marginal cost
 many factors will affect the ultimate choice
of the material and engineers should  any increased economic activity must be
consider all major cost elements, such as justified based on the following
machinery and equipment, tooling, fundamental economic principle:
labor, and material. marginal revenue must exceed
marginal cost.
 other factors may include press and
assembly, production and  is the additional revenue made possible by
engineered scrap, the number of increasing the activity by one unit (or a
dies and tools, and the cycle times small unit).
for various processes. Principle 4: Additional risk is not taken
without the expected additional return
Cost Reduction
 for delaying consumption, investors
 a project that attempts to lower a firm's
demand a minimum return that must be
operating costs.
greater than the anticipated rate of
Equipment Replacement inflation or any perceived risk.

 it considering the expenditure necessary to

replace worn-out or obsolete equipment.
Chapter TWO

Cost of Money
Fundamental Principles of Engineering
Interest
Economics

The four principles of engineering economics  is what you pay the bank for your car
are as follows: loan or your unpaid credit card
balance.
 is what the bank pays you for the money in
your savings account.

 Interest is a rental fee for money.

  Interest is a fee paid or a fee earned for  two types of simple interest: EXACT and
the use of money. ORDINARY

Engineering economy generalizes this definition Exact - a year is considered 365 days if it is a
about; leap year

Interest Ordinary - a year is considered of 360 days

 is the return on capital. - assume 30-days each month

 it is typically expressed as an annual
interest rate
 the rate equals the ratio of the interest
amount and the capital amount FORMULAS:
 is used to calculate the time value of I = Prt
money, and it is crucial to the practice of
engineering F = P+ I

F = P + Prt
I= Prt ; where P =
principal r F = P(1+rt)
= rate t=
time

Capital where;

P= Value or amount of money at a time

 is the invested money and resources
designated as the present time t=0. Initial
deposit, Investment made at t=0.

Interest rate F= Value or amount of money at some future

time.
 is a percentage added to an amount of
money over a specified length of time. A= Series of equal consecutive end of period
amounts of money n= Number of interest
periods (year, month, day)

i = interest period per time period (percent

per year, percent per month). t = stated
Interest paid Interest earned time period (years, months, days)
MONTH DAYS
January 32
February 28
29 – leap year
March 31
April 30
May 31
June 30
July 31
August 31
Simple Interest
September 30
 simple interest, the interest calculated for October 31
years 2, November 30
3, . . . is based on the initial deposit December 31
 no interest is computed on the accrued
interest Note:
 its principal use is in short-term loans,
but compound interest is the norm even If century year it is leap year that is divisible by
then. 400 (e.g. 1600,1700)
Dili leap year kay divisible by 4 (e.g. 1988,
1992, and 1996)