CE 132 Engineering Economics Basic Terms and Principles of Economics

CE 132 relative to cost of production and
Engineering Economics therefore will yield a high profit.

 Market – a place where sellers and
Basic terms and principles of economics: buyers come together. A limited locality
In many economic studies, there are two basic where certain goods such as those which
types of factors to be considered: are perishable are sold, is said to be a
local market. Certain goods sold all
 Tangible factors – are those which can over the country are said to have
be expressed in terms of monetary national market. Goods that are
values. exported to other countries are said to
 Intangible factors – are those which are have a world market.
difficult or impossible to express  Consumer goods - are those that are
definitely in terms of monetary values. consumed or used directly by the
 Perfect competition - occurs when people, or are things and services which
certain product is offered for sale by serve to satisfy human needs.
many vendors or suppliers, and there is Examples: clothes, food, houses,
no restriction against other vendors from medical services and beauty services.
entering the market. Buyers are free to  Producer goods - are those which
buy from any vendor, and the vendors, produce goods and services for human
are free to sell to anyone. consumption, such as generators, tools,
 Monopoly - the opposite of perfect busses, and airplanes. These are
competition. A perfect monopoly instrumental in producing something or
occurs when a unique product or service furnishing service for people.
is available only from a single supplier  Demand – it is the quantity of a certain
and entry of all other possible suppliers commodity that is bought at certain
is prevented. Under conditions of price at a given place and time.
perfect monopoly, the single vendor can
control the supply and the price of the Law of Demand:
product or service. The demand for a commodity varies
 Oligopoly – occurs when there are few inversely as the price of the commodity, though
suppliers and any action taken by not proportionately. When the price of the
anyone of them will definitely affect the commodity is low, the demand is great, for then
course of action of the others. Examples more people will be able to afford the price of
of oligopolies in the Philippines are the the commodity. However, as the price
oil companies and the manufacturers of increases, the demand decreases.
soft drinks who hold franchise to
produce drinks of foreign origin. It is  Utility – capacity of a commodity to
observed that any change anyone of satisfy human want. If the utility of a
them makes is usually accompanied by a certain good to a certain individual is
similar change by the other competitors. great, his demand for that good will be
 Price – the amount of money or its great. The demand for a certain good
equivalent which is given in exchange varies directly as the utility.
for it. Goods that are in great demand
and are scarce command a high price
Law of diminishing utility: an increase in output up to a certain extent,
beyond which the output will decrease or even
An increase in the quantity of any good
become nil. Likewise, water is essential to the
consumed or acquired by an individual will
growth of rice, but too much of it, as in a flood,
decrease the amount of satisfaction derived
will kill the plants.
from that good. If a man has only one car, the
utility of that car to him would indeed be great. Increasing the span of bridges will reduce the
However, a second similar car would not have cost of abutments and piers, but will definitely
as much utility as the first. A third similar car increase the cost of the superstructure.
would practically have very little use. Thus,
Compromise between perfection and
manufacturers of similar goods vary the style,
economy: Perfection is a human ideal worth
the size, and the use of the goods they
striving for. However, in the practical world,
manufacture.
compromise from perfection is usually the rule.
 Marginal utility of a commodity - is Complete quality control of all the units
the utility of the last unit of the same produced by a factory is to be desired, but it will
commodity which is consumed or definitely increase the cost of manufacturing,
acquired. such that the goods are priced out of the market.
 Supply – the quantity of a certain It is desired that a machine function properly as
commodity that is offered for sale at a a physical unit, but it must also function
certain price at a given place and time. properly as an economic unit. For example, the
A merchant may have more goods in his perfect airplane that is crash-proof can be made,
warehouse, but if he only wishes to sell but it will not be able to lift itself off the ground.
a certain quantity, then that quantity
Principles of engineering economy: Once the
represents the supply.
problem is clearly defined, the solution can be
Law of supply: discussed in terms of seven principles…
The supply of a commodity varies directly as the 1. Develop the alternatives: The choice
price of a commodity, though not is among alternatives. The alternatives
proportionately. As the price increases, the need to be identified and then defined
supply also increases. As price decreases, the for subsequent analysis.
supply also decreases. 2. Focus on differences: Only the
differences in expected future outcomes
Law of supply and demand: among the alternatives are relevant to
their comparison and should be
When free competition exists, the price of a
considered in the decision.
product will be that value where supply is equal
3. Use a consistent viewpoint: The
to the demand. No sale exists if the buyer and
seller do not agree on a common price for the prospective outcomes of the alternatives,
commodity. The price is determined only when economic and other, should be
the demand is equal to the supply and a sale consistently developed from a defined
occurs. viewpoint.
4. Use a common unit of measure: Using
Law of diminishing returns: a common unit of measurement to
enumerate as many of the prospective
in agriculture, increasing gradually the quantity
outcomes as possible will make easier
of fertilizer for a fixed area of land will result in
the analysis and comparison of the I = Pin
alternatives. Where: I = total interest earned by the principal
5. Consider all relevant criteria: P = amount of the principal
Selection of preferred alternative i = Rate of interest expressed in
requires the use of a criterion (or several decimal form
n = number of interest periods
criteria).

6. Making uncertainty explicit:
Principal - the amount of money borrowed and
Uncertainty is inherent in projecting the on which interest is charged.
future outcomes of the alternatives and
should be recognized in their analysis Rate of interest – it is the amount earned by one
and comparison. unit of principal during a unit of time.
7. Revisit your decisions: The initial Ordinary simple interest – it is computed on
projected outcomes of the selected the basis of one banker’s year which is 12
alternative should be subsequently months, each consisting of 30 days or 360 days
compared with actual results achieved. in a year.
Exact simple interest – it is based on the exact
number of days, 365 days for ordinary year and
Time value of money: 366 days for a leap year.
The term capital refers to wealth in the form
of money or property that can be used to
produce more wealth. The majority of
engineering economy studies involve
commitment of capital for extended periods of
time, so the effect of time must be considered. In
this regard, it is recognized that a P 100 today is
worth more than P 100 one or more years from
now because of interest (or profit) it can earn.
Therefore, money has time value.
Equity capital – is that owned by individuals
who have invested their money or property in a
business project or venture in the hope of
receiving a profit.
Borrowed capital – is obtained from lenders for
investment. In return the lenders receive interest
from the borrowers.
Interest – is the amount of money paid for the
use of borrowed capital. For the lender, is the
income produced by the money which he has
lent.
Simple interest – if the interest to be paid is
directly proportional to the length of time the
amount or principal is borrowed.

CE 132 Engineering Economics Basic Terms and Principles of Economics

Uploaded by

Copyright:

Available Formats

CE 132 Engineering Economics Basic Terms and Principles of Economics

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CE 132 Engineering Economics Basic Terms and Principles of Economics

Uploaded by

Copyright:

Available Formats

CE 132 relative to cost of production and

Engineering Economics therefore will yield a high profit.

You might also like