CE40 / BSN# ________

--, 20--

July

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---Activity No. ______

Economics is the scientific study of human action as it relates to human

choice and utilization of scarce resources. It is a social science that describes
the factors that determine the production, distribution and consumption of
goods and services.
Engineering Economy is the application of engineering or mathematical
analysis and synthesis to decision making in economics. It is the application
of economic factors and criteria to evaluate alternatives considering the time
value of money in a specific measure over a specific time period.
Engineering Analysis is a systematic approach to determining the
optimum use of scarce resources, involving comparison of two or more
alternatives in achieving a specific objective under the given assumptions
and constraints.
Father of Engineering Economy: Eugene L. Grant
Father of Economic/Engineering Analysis: _____________________
Consumer goods/services are tangible commodity produced and
subsequently purchased to satisfy the current wants and perceived needs of
the buyer.
Producer goods/services are called intermediate goods, they
manufactured and used in further manufacturing, processing or resale.

are

Necessities are goods or services whose consumption is essential to human

survival.
Luxuries are products which are not necessary but which tend to make life
more pleasant for the consumer. These goods are more costly than
necessities and often bought by individuals that have a higher disposable
income.
Demand is a principle that describes a consumers desire and willingness to
pay a price for a specific good or service.
Supply represents how much the market can offer. It is amount of a certain
good producers are willing to supply when receiving a certain price.

Elastic Demand is a demand that increases or decreases as the price of an

item goes up or down.
Inelastic Demand is when the demand for a product does not increase or
decrease correspondingly with a fall or rise in its price.
Unitary Elasticity is where a change in one factor causes an equal or
proportional change in another factor.
Perfect Competition is a situation prevailing in a market in which buyers
and sellers are so numerous and well informed that the elements of
monopoly are absent and the market price of a commodity is beyond the
control of individual buyers and sellers.
Monopoly exists when a specific person or enterprise is the only supplier of
a particular commodity. They are characterized by a lack of economic
competition to produce the good or service, and a lack of viable substitute
goods.
Oligopoly is a state of limited competition between few parties, in which a
market is shared by a small number of producers or sellers.
Law of Supply and Demand is the interaction between the supply of a
resource and the demand of a resource. The law defines the effect that the
availability of a particular product or demand for that product has a price. If
there is a low supply and a high demand, the price will be high and if there is
greater supply and low demand, the price will also be lowered.
Law of Diminishing Returns states that if one factor of production is
increased while other factors are held constant, the output per unit of the
variable factor will eventually diminish. It is the decrease in the marginal
output of a production process as the amount of a single factor is
incrementally increased, while other factors of production stay constant. This
condition will at some point yield lower incremental per-unit returns.
Functions of Engineering Economy:
1. Develop the alternatives. The feasible alternatives need to be
identified and then defined for subsequent analysis
2. Focus on the differences of the alternatives only the differences in
the expected future outcomes among the alternatives are relevant
to their
3. Use a constant view point for all the alternatives the prospective
outcomes of the feasible alternatives should be developed from a
consistent and defined view point.
4. Use a common unit of measurement for comparison among
alternatives it is to enumerate as many of the prospective

outcomes as possible will make easier the analysis and comparison

of the feasible alternatives
5. Consider all relevant criteria selection of preferred alternative is
done.
6. Make uncertainty explicit Uncertainty is inherent
7. Review your decisions Improved decision making results from an
adoptive process

Engineering Economic Techniques:

1. Economy Analysis considers all factors affecting the economy of the
project which can be reduced to specific monetary values. Determines
the initial cost of the project, operation, maintenance, the needed
working capital and probable income the project will generate when
operational
2. 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 extent of the amount obtained in the economy
analysis.
3. Intangible Analysis determines all aspects of the project which cannot
be reduced to monetary values and considers the uncertainty and the
risk inherent in the project. Its scope includes the so called judgement
factor whose analysis depends upon the judgement of the responsible
persons involved in a project.

Engineering Economic Analysis Procedure:

1. Problem recognition, definition and evaluation problem must be well
understood and stated in an explicit form before the project team
proceeds the analysis
2. Development of the feasible alternatives searching for potential
alternatives, screening them to select a smaller group of feasible
alternatives for detailed analysis
3. Development of the outcomes and cash flows for each alternative
cash flow approach, nonmonetary factors (meeting or exceeding
customer expectations, safety to employees, employee satisfaction,
etc.)

4. Selection of a criterion long-term interest of the client and the

organization, environmental concerns, etc.
5. Analysis and Comparison of the alternatives based on cash flows,
exchange rate, inflation, regulations, etc.
6. Selection of the preferred alternatives a result of the total effort of
the above mentioned 5 steps. It is the technical economic modelling.
7. Performance monitoring and post monitoring results accomplished
during and after the time that the result achieved. The aim of post
evaluation is to learn how to do the job better.