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001.the Basics of Engineering Economy

This document provides an overview of engineering economy concepts including: 1) Engineering economy analyzes factors that affect the economic success of projects to recommend best use of capital. 2) Principles of engineering economy include developing alternatives, focusing on differences, using consistent viewpoints, common units of measure, and considering all relevant criteria. 3) Key cost terminology includes fixed, variable, incremental, recurring, nonrecurring, direct, and indirect costs. 4) The general economic environment involves consumer/producer goods, necessities/luxuries, supply/demand laws, and market types like perfect competition and monopoly.

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John Vincent Dela Cruz
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87 views

001.the Basics of Engineering Economy

This document provides an overview of engineering economy concepts including: 1) Engineering economy analyzes factors that affect the economic success of projects to recommend best use of capital. 2) Principles of engineering economy include developing alternatives, focusing on differences, using consistent viewpoints, common units of measure, and considering all relevant criteria. 3) Key cost terminology includes fixed, variable, incremental, recurring, nonrecurring, direct, and indirect costs. 4) The general economic environment involves consumer/producer goods, necessities/luxuries, supply/demand laws, and market types like perfect competition and monopoly.

Uploaded by

John Vincent Dela Cruz
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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MODULE

THE BASICS OF ENGINEERING ECONOMY

Learning Objective: At the end of the module, the students will be able to (a) present the
concepts and principles of engineering economy.

Content : 1. What is Engineering Economy


2. Principles of Engineering Economy
3. Cost Terminologies
4. The General Economic Environment

Engineering Economy is the analysis and evaluation of the factors that will affect the economic
success of engineering projects to the end that a recommendation can be made which will insure the best
use of capital.

Principles of Engineering Economy


1. Develop the Alternatives
The choice (decision) is among alternatives. The alternatives need to be identified and defined
for subsequent analysis.
2. Focus on the Differences
Only the differences in expected future outcomes among the alternatives are relevant to their
comparison and should be considered in the situation.
3. Use a Consistent Viewpoint
The prospective outcomes of the alternatives, economic and other, should be consistently
developed from a defined viewpoint (perspective)
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 alternatives.
5. Consider all Relevant Criteria
Selection of a preferred alternative requires the use of several criteria. The decision process should
consider both outcomes enumerated in monetary unit and those expressed in some other unit of
measurement or made explicit in a descriptive manner.
6. Make Uncertainty Explicit
Risk and uncertainty are inherent in estimating the future outcomes of the alternatives and
should be recognized in the analysis and comparison.
7. Revisit your Decisions
Improved decision making results from an adaptive process; to the extent practicable, the initial
projected outcomes of the selected alternatives should be subsequently compared with actual
results achieved.
Cost Terminologies
1. Fixed costs are those unaffected by changes in activity level over a feasible range of
operations for the capacity or capability available.
2. Variable costs are those associated with an operation that vary in total with the quantity of output
or other measures of activity level.
3. An incremental cost (or incremental revenue) is the additional cost (or revenue) that results
from increasing the output of a system by one (or more) units.
4. Recurring costs are those that are repetitive and occur when an organization produces similar
goods or services on a continuing basis
5. Nonrecurring costs are those which are not repetitive, even though the total expenditure may be
cumulative over a relatively short period of time.
6. Direct costs are costs that can be reasonably measured and allocated to a specific work output
or work activity.
7. Indirect costs are costs that are difficult to attribute or allocate to a specific output or work
activity.
8. Standard costs are representative costs per unit of output that are established in advance of actual
production or service delivery.

The General Economic Environment


Consumer and Producer Goods and Services
Consumer goods and services are those products or services that are directly used by people to satisfy
their wants.
Producer goods and services are used to produce consumer goods and services or other producer
goods.

Necessities and Luxuries


Necessities are those products or services that are required to support human life and activities, that
will be purchased in somewhat the same quantity even though the price varies considerably.
Luxuries are those products or services that are desired by humans and will be purchased if money is
available after the required necessities have been obtained.

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

Demand
Demand is the quantity of a certain commodity that is
bought at a certain price at a given place and time.
1. Elastic Demand occurs when a decrease in selling price
result in a greater than proportionate increase in sales.
2. Inelastic Demand occurs when a decrease in selling
price produces a less than proportionate increase in sales.
3. Unitary Elastic Demand occurs when the mathematical product of volume and price is
constant.
Types of Market
1. Perfect Competition occurs in a situation where a commodity or service is supplied by a number of
vendors and there is nothing to prevent additional vendors entering the market.
2. Monopoly is the opposite of perfect competition. A perfect monopoly exists when a unique product
or service is available from a single vendor and that vendor can prevent the entry of all others into
the market.
3. Oligopoly exists when there are so few suppliers of a product or service that action by one will
almost inevitably result in similar action by the others.

The Law of Supply and Demand


1. The law of demand says that at higher prices, buyers will demand less of an economic good.
2. The law of supply says that at higher prices, sellers will supply more of an economic good.

The Law of Diminishing Returns


“When the use of one of the factors of production is limited, either is increasing cost or by absolute
quantity, a point will be reached beyond an increase in the variable factors will result in a less than
proportionate increase in output.”

Reference:
Sta. Maria, H.B. (2000). Engineering Economy (3rd Ed). National Book Store
Sullivan, W.G., et al (2015). Understanding Engineering Economy (16th Ed). Pearson Education Inc.

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