engineering economy power point presentation

ppt notes

1. ENGINEERING
ECONOMY
Instructor: Engr. Winnie Rossette Bae Flores

2. Basic EconomicPrinciples
Introduction01
ReasonsforStudying
EngineeringEconomics02
EngineeringEconomy
Technique04
Important
Applicationsof
Engineering
Economy
03

3. INTRODUCTION
1-01

4. Economicsisoneofthesocialscienceswhich
consistsofthatbodyofknowledgedealingwith
peopleandtheirassetsorresources.Economics
hasalsodefinedasthesumtotalofknowledge
whichtreatsofthecreationandutilizationofgoods
andservicesforthesatisfactionofhumanwants.
INTRODUCTION

5. Engineeringeconomyisdefinedasthatbranch
ofeconomicswhichinvolvestheapplicationof
definitelawsofeconomics,theoriesofinvestment
andbusinesspracticestoengineeringproblems
involvingcost.
INTRODUCTION

6. Engineeringeconomymayalsobeconsidered
tomeanthestudyofeconomicproblemswiththe
conceptofobtainingthemaximumbenefitatthe
leastcost.Engineeringeconomyalsoinvolvesthe
studyofcostfeaturesandotherfinancialdataand
theirapplicationsinthefieldofengineeringas
basesfordecision.
INTRODUCTION

7. REASONS FOR STUDYING
ENGINEERING ECONOMY
1-02

8. (1)Engineers,asagroup,
havewroughtimmensechangesin
improvingtheeconomicwell-
beingofmankindthroughtheir
inventionsandtheirapplicationsof
scientificprinciplestothevaried
problemsofindustry.
(2)Intheprofessionallife
ofengineers,itisreadilyobserved
thatthemostsuccessfulonesare
thosewhograduallydivorce
themselvesfromthetechnical
aspectsofengineeringrelatedto
engineeringwork.
REASONS FOR STUDYING
ENGINEERING ECONOMY

9. IMPORTANT
APPLICATIONS OF
ENGINEERING ECONOMY
1-03

10. (1)Seekingofnew
objectivesforthe
applicationsof
engineering.
IMPORTANT APPLICATIONS OF
ENGINEERING ECONOMY
(2) Discovery of
factors limiting
the success of a
venture or
enterprise.
(3) Analysis of
possible
investment of
capital.

11. (4) Comparison of
alternatives as a
basis for decision.
IMPORTANT APPLICATIONS OF
ENGINEERING ECONOMY
(5) Determination
of bases for
decision.

12. ENGINEERING ECONOMY
TECHNIQUE
1-04

13. (1) the
economy
analysis
ENGINEERING ECONOMY
TECHNIQUE
(2) the
financial
analysis
(3) the
intangible
analysis
The complete analysis of a proposed project involves
three basic steps according to Bullinger, as follows:

14. ENGINEERING ECONOMY
TECHNIQUE
The economy analysis considers all factors
affecting the economy of the project which can be
reduced to specific monetary values. It determines
the initial cost of the project, the costs for
operation and maintenance, the needed working
capital, the probable income the project will
generate when operational, the rate of return on
the investment, and all other cost factors.

15. ENGINEERING ECONOMY
TECHNIQUE
The primary purpose of the financial analysis
is the determination of the methods and resources
of financing the project, either through equity
capital or borrowed capital, or a combination of
both.

16. ENGINEERING ECONOMY
TECHNIQUE
It tries to discover the best methods of
financing the project to the extent of the amount
obtained in the economy analysis. The financial
analysis follows the economic analysis since it is
dependent upon the latter for necessary data.

17. ENGINEERING ECONOMY
TECHNIQUE
The intangible analysis determines all aspects
of the project which cannot be produced to
monetary values and considers the uncertainty and
the risk inherent in the project. Its scope includes
the so-called judgment factor whose analysis since
it is dependent upon the latter for necessary data.

18. Basic Termsand Principlesof
Economics
Tangible and
Intangible Factors05 06
Oligopoly08Monopoly07
Competition
Local and National
Market10
Price and
Production09

19. Basic Termsand Principlesof
Economics
Consumerand
Producer Goods11 12
ElasticityofDemand14LawofDemand13
Demand
LawofDiminishing
Utility16
Utilityand
Demand15

20. Basic Termsand Principlesof
Economics
Marginal Utility17 18
LawofSupplyand
Demand20LawofSupply19
Supply
Marginal Revenue
and Marginal Cost22
LawofDiminishing
Returns21

21. Basic Termsand Principlesof
Economics
Physicaland
EconomicEfficiency23 24
Compromise
betweenPerfection
and Economy

22. TANGIBLE AND
INTANGIBLE FACTORS
1-05

23. TANGIBLE AND INTANGIBLE
FACTORS
Tangible factors are those which can be
expressed in terms of monetary values, while
intangible factors are those which are difficult or
impossible to express definitely in terms of
monetary values. Intangible factors are also called
irreducible factors.

24. COMPETITION
1-06

25. Most economic laws are premised and stated
for situations in which free or perfect competition
exists. Perfect competition occurs when a certain
product is offered for sale by many vendors or
suppliers, and there is no restriction against other
vendors or suppliers from entering the market.
Buyers are free to buy from any vendor, and the
vendors, like wise, are free to sell to anyone.
COMPETITION

26. MONOPOLY
1-07

27. Monopoly is the opposite of perfect
competition. A perfect monopoly occurs when a
unique product or service is available only from a
single supplier and entry of all other possible
suppliers is prevented. Under conditions of perfect
monopoly, the single vendor can control the supply
and the price of the product or service.
MONOPOLY

28. OLIGOPOLY
1-08

29. Oligopoly occurs when there are few suppliers
and any action taken by anyone of them will
definitely affect the course of action of the others.
OLIGOPOLY

30. PRICE AND PRODUCTION
1-09

31. The price of a good or commodity is defined
to be the amount of money or its equivalent which
is given in exchange for it. In a capitalistic system,
industry is based on profit, and profit is in based on
price. Goods that are in great demand and are
scarce command a high price relative to cost of
production and therefore will yield a high profit.
PRICE AND PRODUCTION

32. Price therefore regulates production. If prices
go up, production will increase. If prices decrease,
production will also decrease or cease.
PRICE AND PRODUCTION

33. LOCAL AND NATIONAL
MARKET
1-10

34. A market defined to be a place where sellers
and buyers come together. A limited locality where
certain goods such as those which are perishable
are sold, is said to be a local market. Certain goods
sold all over the country are said to be have a
national market. Goods that are exported to other
countries are said to have a world market.
LOCAL AND NATIONAL MARKET

35. CONSUMER AND
PRODUCER GOODS
1-11

36. CONSUMER AND PRODUCER
GOODS
Consumer goods are those that are consumed
or used directly by people, or are things and
services which serve to satisfy human needs.

37. CONSUMER AND PRODUCER
GOODS
Producer goods are those which produce
goods and services for human consumption. These
are instrumental in producing something or
furnishing service for people.

38. DEMAND
1-12

39. Demand is the quantity of a certain
commodity that is bought at a certain price at a
given place and time. It should not be confused
with the quantity of the commodity which a person
desires to purchase. Desire without actual purchase
of the commodity does not constitute demand.
DEMAND

40. LAW OF DEMAND
1-13

41. The law of demand may be stated as:
The demand for a commodity varies inversely as
the price of the commodity, though not
proportionately.
LAW OF DEMAND

42. The price-demand relationship is illustrated in
Fig. 1-01.
Fig 1-01. Price-Demand
Relationship for
Necessities and Luxuries
LAW OF DEMAND

43. It will be noted from Fig. 1-01 that when the
price of a commodity is low, the demand is great,
for then more people will be able to afford the
price the commodity. However, as the price
increases, the demand decreases.
LAW OF DEMAND

44. ELASTICITY OF DEMAND
1-14

45. Elastic demand occurs when a decrease in
selling price will cause a greater than proportionate
increase in the volume of sales.
ELASTICITY OF DEMAND

46. Inelastic demand occurs when a decrease in
selling price will cause a less than proportionate
increase in sales.
ELASTICITY OF DEMAND

47. Unitary elasticity of demand occurs when the
mathematical product of price and volume of sales
remains constant regardless of any change in price.
��=??????
where, � = price of the product,
� = volume of sales, and
?????? = a constant.
ELASTICITY OF DEMAND

48. UTILITY AND DEMAND
1-15

49. Utility is defined to be the capacity of a
commodity to satisfy human. If the utility of a
certain good to a certain individual is great, his
demand for that good will be great.
UTILITY AND DEMAND

50. However, if a certain good has very small
utility the demand will likewise be small. Hence,
the demand for a certain good varies directly as the
utility.
UTILITY AND DEMAND

51. LAW OF
DIMINISHING UTILITY
1-16

52. LAW OF
DIMINISHING UTILITY
An increase in the quantity of any good
consumed or acquired by any individual will
decrease the amount of satisfaction derived from
that good.

53. LAW OF
DIMINISHING UTILITY
The utility of a commodity decreases with an
increase in the quantity available.
To increase the utility of any commodity, it
should be different from other similar
commodities. Thus, manufacturers of the similar
goods vary the style, size, and the use of the goods
they manufacture.

54. MARGINAL UTILITY
1-17

55. The marginal utility of a commodity is the
utility of the last unit of the same commodity
which is consumed or acquired. The last unit of
similar commodities consumed or acquired is
marginal unit.
MARGINAL UTILITY

56. SUPPLY
1-18

57. Supply is the quantity of a certain commodity
that is offered for sale at a certain price at a given
place and time.
SUPPLY

58. LAW OF SUPPLY
1-19

59. The supply of a commodity varies directly as
the price of the commodity, though not
proportionately.
As the price increases, the supply also
increases. Likewise, as the price decreases, the
supply will also decrease. This is graphically shown
in Figs. 1-02 and 1-03.
LAW OF SUPPLY

60. Fig. 1-02. Price-Supply Relationship with Supply as
abscissa
Fig. 1-03. Price-Supply Relationship with Price as
abscissa
LAW OF SUPPLY

61. LAW OF
SUPPLY AND DEMAND
1-20

62. The law may be stated as follows:
When free competition exists, the price of a
product will be that value where supply is equal to
the demand.
LAW OF SUPPLY AND DEMAND

63. Actually this is a combination of the laws of
demand and supply. No sale exists if the buyers
and the sellers do not agree on a common price for
the commodity. The price is determined only when
the demand is equal to the supply and sale occurs.
LAW OF SUPPLY AND DEMAND

64. This is pictured graphically in Fig. 1-04.
Fig. 1-04. Price-Supply-Demand Relationship
LAW OF SUPPLY AND DEMAND

65. LAW OF
DIMINISHING RETURNS
1-21

66. LAW OF
DIMINISHING RETURNS
This law was originally applied to agriculture,
correlating the input of men, fertilizers, and other
variable factors to the output in crops or harvest.

67. LAW OF
DIMINISHING RETURNS
The law may be stated thus:
When one of the factors of production is fixed
in quantity or is difficult to increase, increasing the
other factors of production will result in a less than
proportionate increase in output.

68. MARGINAL REVENUE AND
MARGINAL COST
1-22

69. MARGINAL REVENUE AND
MARGINAL COST
Marginal revenue is that amount received
from the sale of an additional unit of a product.
Marginal cost is the additional cost of producing
one more unit.

70. MARGINAL REVENUE AND
MARGINAL COST
When free competition exists, the number of
units produced that will give the maximum profit is
that for which the marginal revenue and marginal
cost are equal.

71. PHYSICAL AND
ECONOMIC EFFICIENCY
1-23

72. PHYSICAL AND ECONOMIC
EFFICIENCY
The effectiveness of the utilization is
measured by the well-known equation:
���??????�??????���??????=
������
??????����

73. PHYSICAL AND ECONOMIC
EFFICIENCY
Where physical units are involved, efficiency is
measured by:
�ℎ??????�??????�??????� ���??????�??????���??????=
������ ??????� �ℎ??????�??????�??????� ��??????��
??????���� ??????� �ℎ??????�??????�??????� ��??????��
This kind of efficiency can never exceed 100%.

74. PHYSICAL AND ECONOMIC
EFFICIENCY
However, when money is they material,
effective utilization is measured by:
������??????� ���??????�??????���??????=
??????�����
??????���
Unless the economic or financial efficiency
exceeds 100%, the investment of capital, from a
strictly financial viewpoint is not recommended.

75. PHYSICAL AND ECONOMIC
EFFICIENCY
A common measure of financial efficiency is
the so-called rate of return given by the formula:
????????????�� �� ??????�����=
??????���??????� ��� ����??????�
????????????�??????�??????� ??????�������
This is the most universally accepted measure of
financial effectiveness.

76. PHYSICAL AND ECONOMIC
EFFICIENCY
Another measure of economic efficiency is the
payout period:
�????????????���=
????????????�??????�??????� ??????�������
��� ??????���??????� ????????????�ℎ ����
This ratio determines the number of years
necessary to recover the amount of invested
capital from the earnings of the investment.

77. COMPROMISE BETWEEN
PERFECTION AND
ECONOMY
1-24

78. COMPROMISE BETWEEN
PERFECTION AND ECONOMY
Complete quality control of all the units
produced by a factory is to desired, but it will
definitely increase the cost of manufacturing, such
that the goods are priced out of the market. It is
desired that a machine function properly as an
economic unit.