Section 2

Topic:
Fundamentals and concepts of Economic theories
Background:

In principle, economics deals with the interactions

between men and wealth, how individual/firm/nation
make choices on allocating scarce resources to
satisfy their unlimited wants.
Engineering is concerned with maximizing the
benefit from the wealth or natural resources, or find
cost-effective ways to achieve a target.
Thus, the objectives of economics and engineering
works are almost similar and linked.
1

Economy and Economics

Economy
An economy is the activities related to the
production, exchange, saving, distribution and
consumption of goods and services in a particular
geographic region.
An economy also consists of the economic systems
of a country or other area; the labor, capital, land
resources and manufacturing, trade and investment
of goods of that area.
Economy is the condition of wealth, goods and
services whereas Economics is the subject which
deals with economy.
2

Economics
Economics is the science (social science) that analyzes the
production, distribution, and consumption of goods and
services.
Economic analysis may be applied throughout society, as in
business, finance, health care, and government, but also to
such diverse subjects as, crime, education, the family, law,
politics, religion, social institutions, war, science and
engineering.
Economics explains how people interact within markets to get
what they want or accomplish certain goals.
The following are the economic goals.

A high level of employment

price stability
efficiency
an equitable distribution of income and
growth

Economics and Finance

Finance is the science that describes the
management
of
money,
banking,
credit,
investments, and assets.
Basically, finance looks at anything that has to do
with money and market.
Generally, finance focuses on the study of prices,
interest rates, money flows and financial markets.
Finance is the study of how investors allocate their
assets over time under conditions of certainty and
uncertainty
Economics and finance are interrelated, and inform
4
and influence each other.

Economic Efficiency
Economic efficiency is the ratio of output to input of
a business system.
Economic Efficiency (%)

Output
Worth
100
100
Input
Cost

Worth is the annual revenue generated by way of

operating the business and
Cost is the total annual expenses incurred in
carrying out the business.
For the survival and growth of any business, the
economic efficiency should be more than 100%.
Economic efficiency is also called productivity.
5

 There are several ways of improving productivity.

Increased output for the same input
Decreased input for the same output
By a proportionate increase in the output which is
more than the proportionate increase in the input
By a proportionate decrease in the input which is
more than the proportionate decrease in the
output.
Through simultaneous increase in the output with
decrease in the input

Demand and Supply

Supply and demand are the most fundamental tools
of economic analysis.
Supply and demand is also considered as a basic
economic concept, as well as a vital part of a free
market economy
The market price of an item is determined by both
supply and demand of that item.
The relationship between supply and demand has a
good deal of influence on the price of goods and
services.
7

Demand
Demand represents how much (quantity) of an item (product
or service) is desired by buyers.
Demand is the amount of the product or service that buyers
want to purchase.
The term demand signifies the ability or the willingness to
buy a particular commodity at a given point of time.

Supply
Supply is the amount of something, such as a product or
service, that a market has available.
Supply is defined as the quantity of a product that a producer
is willing and able to supply onto the market at a given price
in a given time period.
8

Demand curve
Graphical presentation of quantity demanded of a good
versus price is termed as demand curve.
In economics, the demand curve is the graph depicting the
relationship between the price of the good and the amount or
quantity of it.
The demand curve indicates negative relationship between
price and quantity.

Law of demand
In economics, the law of demand is an economic law, which
states that consumers buy more of a good when its price is
lower and less when its price is higher, if other factors
remaining constant.
The Law of demand states that the quantity demanded and
the price of a commodity are inversely related.
This is Because, the price of a good or service increases,
consumer demand for the good or service will decrease and
vice versa.
This law summarizes the effect price changes have on
consumer behavior. For example, a consumer will purchase
more pizzas if the price of pizza falls. The opposite is true if
the price of pizza increases.
10

Supply curve
In economics, supply curve is the graphic representation of
the relationship between product price and quantity of
product that a seller is willing and able to supply.
Product price is measured on the vertical axis of the graph
and quantity of product supplied on the horizontal axis.
The supply curve shows an upward slope, meaning that the
higher the price, the higher the quantity supplied.

11

Law of Supply
The law of supply is a fundamental principal of
economic theory which is that quantities respond in
the same direction as price changes.
In other words, the law of supply states that (all
other things unchanged) an increase in price results
in an increase in quantity supplied.
This happens because at a higher price, the
producer will earn more revenue by selling higher
quantity.
This law describes the behaviour of producers.
12

Relationship between demand and supply

The relationship between demand and supply underlies the
forces behind the allocation of resources.
In understanding market forces, supply and demand refers the
concept of need and supply of goods and services in the
market.
The law of demand states that, if all other factors remain
equal, the higher the price of a product, the less people will
demand that product or good.
Therefore, the higher the price, the lower the quantity
demanded.
The amount of goods that consumers purchase at a higher
price is less because as the price of goods increase, so does
the opportunity cost of buying that product.
As a result, people will naturally avoid buying a product that
will force them to forgo the consumption of something else
13
that they value more.

Market Equilibrium
According to principles of economics, when the supply and
demand curves intersect, the market is in equilibrium.
This is where the quantity demanded and quantity supplied
is equal.
The corresponding price is the equilibrium price or marketclearing price, the quantity is the equilibrium quantity.

14

Cost
Cost is an amount that has to be paid or given up
in order to get something.
In business and accounting, cost is the monetary
value that a company has spent in order to produce
something.
The term costs refers the monetary value of
expenditures for raw materials ,supplies, services,
labor, products, equipment and other items purchased
for use by a business or other accounting entity.
It does not include the mark-up for profit.
The term cost estimating is frequently used to
describe the process by which the present and future
cost consequences of engineering designs are
forecast.
15

Revenue
Revenue is the total amount of money received by the
company for goods sold or services provided during a certain
time period.

It
also
includes
all net
sales,
exchange
of
assets; interest and any other increase in owner's equity and
is calculated before any expenses are subtracted.

Revenue = cost + profit or net benefit (for a period of time)

It is the "top line" or "gross income" figure from which costs
are subtracted to determine net income.
In the case of government, revenue is the money received
from taxation, fees, fines, inter-governmental grants or
transfers, securities sales, mineral rights and resource rights,
as well as any sales that are made.
16

Cost Curve
In economics, cost curve is the graphical presentation of the
costs of production as a function of total quantity produced.
Total cost is the cost of producing some output at some
particular rate.
Average cost is the cost per unit item.

17

Revenue Curve
Revenue curve or benefit curve is the graphical presentation
of the revenue obtained from the quantities produced.
The vertical difference between cost curve and revenue curve
represents the net financial benefit

18

 The net benefit is the difference between total cost

and total income or revenue, i.e.
Net benefit = total revenue - total cost
Maximum net benefit can be determined by
constructing cost and revenue curve, and
measuring the vertical difference between them.
The cost and revenue curves help in identifying
input condition for maximizing net benefit

19

Components of total cost

Main steps in cost estimation are:
- To identify the cost components
- To identify approach/technique of cost estimation
Total cost of production of a particular item can be
divided into two portions:
(i) Fixed cost, and
(ii) Variable cost

20

Fixed Cost
Fixed cost is the portion of the total cost that requires
regardless of the amount of production.
Fixed costs are those costs which are unaffected (remain
constant) due to change in activity level within the capacity.
Examples are - licence fee, rent of the office building,
tax and insurance of facilities, different types of salaries etc.

Variable Cost
Variable costs are those costs which vary directly with the
activity level or quantity of output.
It increases with the increase in production, and decreases
with the decrease in production.
Examples are labour cost, interest on running capital, etc.
Fixed costs and variable costs comprise total21cost.

Classification of Cost
There are several types of costs that a firm may consider
relevant under various circumstances.
For the purposes of decision-making, it is essential to know
the fundamental difference between the main cost concepts
along with the conditions of their use in decision-making.
Such costs include:
direct costs
indirect costs
opportunity costs
sunk costs
fixed costs
variable costs
standard costs
private costs
social costs
common costs, etc.

22

Economic consideration
For economic production process, one must use the
least costly combination of inputs for a particular
level of output.
The optimum mix of output achieves for a given
level of benefits at least cost, or
In other word, the maximum level of benefit for a
given level of cost.
In economic terms, the cost of a scarce resource (e.
g. water) has two broad components:
the cost of its provision [including both fixed (investment) and
variable costs (operation and maintenance)], and
its opportunity cost, or the production value forfeited/offered in
alternate use
23

Opportunity cost
Opportunity cost is the sacrifice related to the
second best choice available to someone.
It is monetary advantage/gain of a resource in an
alternative uses.
Under resource limiting condition, opportunity cost
need to be considered when comparing alternative
options.
Consider a student who could earn $20,000 for
working during a year, but chooses instead to go
to school for a year and spend $5,000 to do so.
The opportunity cost of going to school for that
year is $25000: $5,000 cash outlay and $20,000
24
for income foregone.

Additional cost
In addition to, initial or first cost, running cost, semi
variable costs, future costs, accounting costs.
Incremental cost, recurring cost, non-recurring cost
and environmental cost of the resource should also
be taken into account.
These costs are real and unavoidable, and someone
have to pay - the user, the taxpayer or future
generations.

25

Initial cost or first cost

It is the installed cost of the asset including
purchase price (including tax, if applicable),
carrying, installation fees, and other costs (direct
and indirect) required to make ready the asset for
use/production.
Running cost
It is cost required to operate/run the system and
keep in service/production.
The amount regularly spent to operate an
organization, used for things such as salaries,
utilities, and rent.
26

Project cost element - example

Project

Cost elements
First cost / Initial cost

Dam

- Cost for land

acquisition
(lease/acquire, if
needed)

Running cost
- Maintenance cost
- Salary for sluice gate
operator
- Opportunity cost of the

- Construction cost

catchment area (to be

- Cost for sluice gate

flooded) (if applicable)

- Installation cost of
sluice gate
27

Project

Cost elements
First cost / Initial cost

Running cost

Hydro-electric - Cost for dam

power plant
- Plant/Equipment cost

- Salary of staffs
- Maintenance/repair
cost
- Stand-by
generator
- Delivery charges of the
cost
- Upgrading cost (if
equipment
- Import tax (if applicable)
applicable)
- Cost for water intake pipe - Opportunity cost of
the catchment area
- Installation and in-house
(to be flooded) (if
training cost
applicable)

28

Example 1
In connection with surfacing a new highway, a contractor has a
choice of two sites on which to set up the asphalt-mixing plant
equipment. The contractor estimates that it will cost RM1.15 per
cubic yard per mile (yd3/mile) to haul the asphalt-paving materials
from the mixing plant to the job location. Factors relating to the two
mixing sites are as follows in Table. The job requires 50,000 cubic
yards of mixing-asphalt-paving materials. It is estimated that four
months (17 weeks of five working days per week) will be required
for the job. Compare the two sites in terms of their fixed, variable,
and total costs. Assume that the cost of the return trip is negligible.
Which is the better site?
Table
Cost Factor
Average hauling
distance
Monthly rental of site
Cost to set up and
remove equipment
Hauling expense
Plagperson

Site A
6 miles

Site B
4.3 miles

RM1000
RM15000

RM5000
RM25000

RM1.15/yd3 RM1.15/yd3
-mile
-mile
29
Not
RM96/day

Components of total revenue

Direct revenue
The revenue earned in routine business activities is
known as direct revenue e.g. sales.
Direct revenue comes from interest on loans and
fee income.
Indirect revenue
Indirect revenue is revenue earned through
external affiliate programs which is paid
periodically.
Monthly deposits generate indirect revenue.
30

Cost and revenue function curve

Cost function
In mathematically, the relationship between cost and input
variable is termed as cost function.
The cost function is a function of input prices and output
quantity.
Its value is the cost of making that output given those input
prices.

Revenue function
Similarly, relationship between revenue and input variable is
known as revenue function.
A revenue function R(x) is set up as follows: R(x)=( price per
unit) x (number of units produced or sold)
When they are plotted in graph, they are called cost and
revenue curve, respectively.
31

Benefit-cost ratio (BCR)

Benefit-Cost ratio is the ratio of total benefit (B) to the
total cost involved (C).
The benefit-cost ratio is computed by dividing the annual
benefit by the annual cost.
A benefit-cost ratio is an indicator, used in the formal
discipline of cost-benefit analysis that attempts to
summarize the overall value for money of a project or
proposal.
A benefit-cost ratio greater than 1.0 is considered
economically justified.
If B/C <1.0, the project is not economically acceptable.
In calculating benefit-cost ratio, all pertinent costs and
associated benefits should be taken into account.
BCR

B
C

32

Example 2
The total annual cost for a medium size irrigation
project of the region of Kedah is RM134,100,000.
The annual net benefit for the project considering the
pre and post irrigation facilities is found to be
RM224,300,000. Calculate the benefit-cost ratio for
the project. Is this project is economically viable?

33

Marginal cost and benefit

Marginal cost
Marginal cost measures the change in cost over the change
in quantity (or activity).
Marginal Cost is governed only by variable cost which
changes with changes in output.
Marginal cost which is really an incremental cost can be
expressed in symbols.
That is:
C
Mc
Q
where,
Mc = Marginal cost
C = Change in cost corresponding to change in quantity
produced (Change in total cost)
Q = Change in quantity produced (Change in output)
34

Exercise:
Table
Units of Output

Total Cost (Dollars)

Marginal Cost (Dollars)

12

16

21

29

The total cost of producing one pen is $5 and the total cost of
producing two pens is $9, then the marginal cost of expanding
output by one unit is $4 only (9 - 5 = 4).
The marginal cost of the second unit is the difference between
the total cost of the second unit and total cost of the first unit.
The marginal cost of the 5th unit is $5. It is the difference
between the total cost of the 5th unit and the total cost of the
4th unit and so forth.
35

Example 3
The cost of production of 100 tons of cement is RM
15000 and it is RM 16000 for 110 tons. What is the
marginal cost of production?

36

Marginal benefit
Marginal benefit is a measure of the change in benefits
over the change in quantity.
Marginal benefit is basically the extra amount a person
is willing to pay for a product.
That is, at each level of production, the marginal benefit
refers any additional or reduced benefits incurred for the
production of next unit.
For example, assume there is a consumer wishing to
purchase an additional burger. If this consumer is willing
to pay $10 for that additional burger, then the marginal
benefit of consuming that burger is $10. The more
burgers the consumer has, the less he or she will want
to pay for the next one. This is because the benefit
decreases as the quantity consumed increases.
37

Cost estimation
Importance of cost estimation
Cost estimation is the iterative process of developing an
approximation of the monetary resources needed to
complete project activities.
Accurately forecasting the cost of future projects is vital
to the survival of any business or organization planning
future construction.
Cost estimating is one of the most important steps to
establish the base line of the project cost at different
stages of development of the project.
The managers, professional design team members,
business owners or construction contractors need cost
information to make budgetary and feasibility
38
determinations.

Elements of a Cost Estimate

Project teams should estimate costs for all resources
that will be charged to the project. The elements are
as follows:

Quantities of various materials required

Labour hours
Labour rate
Material prices
Equipment cost
Subcontractor quotes
Software cost
Hardware cost
Indirect cost
39

Direct and Indirect Costs

Direct Cost
The direct or traceable or assignable costs are the ones that
have direct relationship with a unit of operation like a product,
a process or a department of the firm.
In other words, the costs which are directly and definitely
identifiable are the direct costs.
Indirect cost
The indirect or no traceable or common or non-assignable
costs are those whose course cannot be easily and definitely
traced to a plant, a product, a process or a department.
For example, in operating railway services the cost of station,
track, equipment, staff, etc., cannot be assigned to either
passenger or goods transportation; these are indirect costs.
40

 Indirect costs consist of labour, material, and

equipment items required to support the overall
project.
For the owner:
Design fees, permits, land
acquisition costs, legal fees, administration costs,
etc.
For the contractor and subcontractor: Mobilization,
staffing, on-site job office, temporary construction,
temporary utilities, equipment, small tools and
consumables, etc.

41

Factors affecting cost and return

All the cost components can affect the total cost.
In addition, the time(due to time value of money)
and inflation or deflation can affect the total cost of
a project.
Similarly, the time and inflation/deflation can
affect the total return of a project.

42

Factors affecting value of money

The factors affecting value of money include:
Time
Interest rate
Inflation/deflation
Local/regional/international economy
Supply of goods/services and their price

43

Value of money
Value of money is influenced by time. We all will
agree that 100 dollar today is better than 120 dollar
20 years later.
Supply of goods and/or services and their price
temporarily increase or decrease the value of
money (called temporary effect or local effect).

44

Inflation
Inflation is defined as a sustained increase in the
general level of prices for goods and services.
Inflation means that the cost of an item tends to
increase over time, or, to put in another way, the
same dollar amount buys less of an item over time.
It is the rate at which the general level of prices for
goods and services is rising, and, subsequently,
purchasing power is falling.
It is measured as an annual percentage increase.
45

Two types of inflation rate. They are:

General inflation rate ( f )

Specific inflation rate or average inflation rate ( f )

j

The general inflation rate ( f ) can be calculated with the

following equation:

CPI n CPI n 1
f n CPI
n 1
where
f n = the general inflation rate
CPI n = the consumer price index at the end period n
CPI
= the consumer price index at the base period
n = the end period

n 1

46

The specific inflation rate ( f j) can be defined with the

following equation:

CPI n
fj

CPI 0

1
n

where

fj
CPI n
CPI 0

= the specific inflation rate

= the consumer price index at the end period
= the consumer price index for the base period

n = the year

47

Example 4
The following Table shows a utility companys cost to supply
a fixed amount of power to a new housing development; the
indices are specific to the utilities industry. Assume that year
0 is the base period. Determine the inflation rate for each
period, and calculate the average inflation rate over the 3
years.
Year
0
1
2
3

Cost (RM)
504,000
538,400
577,000
629,500

48

Deflation
A general decline in prices, often caused by a
reduction in the supply of money or credit.
Deflation is the opposite of inflation.
It occurs when the inflation rate falls below 0% (a
negative inflation rate).
Deflation can be caused also by a decrease in
government, personal or investment spending.
Deflation has the side effect of increased
unemployment since there is a lower level of
demand in the economy, which can lead to an
economic depression.
49

Economic life or effective life

Effective life or effective service life or economic

life or economic service life of an asset

It is the life-span (number of years) of an
asset/goods during which it can provide its
intended service/production with economic
efficiency (i.e. reasonable service/production
without much maintenance or updating cost).
The point where the total cost is minimum is called
the economical life of an asset.
Estimating the economic life of an asset is
important for businesses.
The concept of economic life is relevant in both
50
replacement and new investment studies.

 The economic life of an asset is determined by the period of

time the asset will provide the lowest cost of service
compared to other alternatives.
In numeric term, it is the number of years up to the minimum
annual worth (AW) of costs.

51

The economic life is also referred to as the economic

service life or minimum cost life.

When n years have passed, the economic life indicates

the asset should be replaced to minimize overall costs.

To perform a replacement study correctly, it is important

that the economic life of the defender be determined,
since their n values are usually not pre established.

The economic life of an asset is determined by calculating

the total annual worth (AW) of costs if the asset is in
service 1 year, 2 year, 3 year, and so on, up to the last
year the asset is considered useful.
52

Total AW of cost is the sum of capital recovery (CR),

which is the AW of the initial investment and any
salvage value, and the AW of the estimated annual
operating cost (AOC), that is,

Total AW = - capital recovery AW of annual operating

costs
= - CR AW of AOC
The economic life is the n value for the smallest total
annual worth (AW) of costs. The AW values are cost
estimates, so the AW values are negative numbers.

53

The economic life or effective life of various engineering

structures is as follows:
No. Engineering Structure or
Asset
1
2
3
4
5
6
7

RCC Road
Asphalt/bituminous Road
RCC Bridge
Brick/cement concrete canal
RCC Building
Water Supply Pump
Steel structure (bridge, column
beam etc)

Economic or effective
life (Year)
15 - 18
18 -20
75 - 100
15 - 25
75 - 100
25 - 40
50 - 100

54

Example 5
A firm is considering replacement of equipment, whose first
cost is RM 4000 and the scrap value is negligible at the end
of any year. Based on experience, it was found that the
maintenance cost is zero during the first year and it
increases by RM 200 every year thereafter. Determine the
economic life of the equipment. When should the
equipment be replaced if interest (i) is 0%?

55

Tax
Income tax
Tax is to impose a financial charge or other levy upon a
taxpayer (an individual or legal entity) by a state or the
functional equivalent of a state such that failure to pay is
punishable by law.
A tax is not a voluntary payment or donation, but an
enforced contribution imposed by government.
Income tax is the amount of taxes based on some form of
income or profit levied by government.
For individuals, private farm, or corporation, income is
taxable.
Tax rate for each country/state varies, normally
incremental tax rate with the increase in income.
For public (Govt.) works or projects, income/revenue is not
56
taxable.

 Tax rate is a percentage, or decimal equivalent, of taxable

income owed in taxes.
The tax rate is graduated; that is, higher rates apply as
taxable income increases.
Taxes = Taxable income (TI) x applicable tax rate (T)
= (TI) (T)
Tax should be deducted from the income for that year, as:
Operating cash flow = Gross profit Tax
Tax for imported items
Tax may also be charged on imported (foreign) items for
capital item or operating inputs. In that case, the price or
cost of the item should be taken as the sum of actual/cited
price and tax.
57

Calculation of income tax

Tax should be calculated on taxable income.
Taxable income (TI) is the amount upon which
income taxes are based.
For corporation, depreciation D and operation
expenses E are tax-deductible
Taxable income (TI) = gross income expenses depreciation
= GI E - D
Depreciation of the capital items is a cost, and that
should be deducted from the gross income.
58

Depreciation
Depreciation means reduction in value of an asset due to
age and/or uses. After some uses, the originality of an asset
(e.g. building, instrument, car, etc.) is decreased, and
consequently the value is decreased.
It declines the market value of an asset
Depreciation is important in economic analysis primarily
because it is used for income-tax computation purposes.
Two types of depreciation are commonly used (application
based) for the purpose of describing the reduced asset
value:
Tax depreciation
Book depreciation
59

Tax depreciation
Tax depreciation is term used to describe the
purpose for reducing asset value.
It is used for after-tax economic analysis.
In many industrialized countries, annual depreciation
of the assets of the industry/ company/ corporation
is tax deductable (termed as tax depreciation).
Tax depreciation is deducted from the income when
computing tax.
Tax depreciation must be calculated using
government approved method/ guidelines/rules.
60

Book depreciation
Book depreciation is a term that refers to the decline
in value of a capital good specifically for tax
purposes.
Book depreciation is used by company, corporation,
organization, and business-farm for their internal
financial accounting.
It is the reduction of value/price of the asset based
upon the usages pattern and effect/productive life of
the asset.
The book depreciation of an asset results in taxdeductible benefits that will save the company
money.
61

Calculation of Book depreciation

Straight line method
Straight line method is considered the standard
against which other depreciation methods are
compared.
The straight-line method provides the easiest
computation for an asset's depreciation.
The life of the equipment and its residual value are
estimated when it is purchased.
According to this method, the value of an asset
decreases linearly with time. That is, the annual
depreciation amount is constant throughout its
effective life or recovery period.
62

Straight line method

The formula for calculating annual straight
line depreciation is
Annual Dep SL DSL

F S

where
DSL= annual depreciation charge
F = first cost of the asset,
S = salvage value of the asset,
n = the effective life or economic life of the
asset in year.
63

 The formula for depreciation and book value are as

follows:

where
BVt = book value of the asset at the end of the
period t
t = year

64

Example 6
A company has purchased an equipment whose first cost is
RM 100,000 with an estimated life of eight years. The
estimate salvage value of the equipment at the end of its
lifetime is RM 20,000. Determine the depreciation charge and
book value at the end of various years using the straight line
method of depreciation.

65

Example 7
The initial cost of an asset is RM 12000, the expected
economic life is 20 years, and salvage value is expected to
RM 2000. Calculate the depreciation rate and the value of
the asset after 15 years.

66

Depletion
Depletion is the reduction in value of natural resources
occurring with land, such as ground water, coal, oil,
mineral, natural gas, or timber.
The objective of depletion is the same as that of
depreciation: to amortize the cost in a systematic
manner over the assets useful life.
Depletion is calculated for tax-deduction and
bookkeeping purposes
There are two methods (types) available for calculating
depletion:
- cost depletion, and
- percentage depletion.
67

Cost depletion
Cost depletion, also called factor depletion is based on
the level of activity or usage not time as in depreciation.
It may be applied to most types of natural resources.
The cost depletion factor (pt) for a particular year t, is:

Annual depletion cost,

The annual cost depletion for some common natural
resources are timber, oil, gas wells, ground water and
so on.
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Percent depletion
Percentage depletion, the second depletion method, is a
special consideration given for certain mineral properties.
The percentage depletion is an allowance of a percentage
of the gross income from the property.
For given mineral property, the depletion allowance
calculation is based on a prescribed percentage of the
gross income from the property during the tax year.
The annual depletion amount is calculated as

The annual percentage depletion for some common natural

deposits are Sulfur, uranium, lead, nickel, gold, silver,
copper and so on.
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Salvage value
Salvage value (SV) is the estimated value of a
property at the end of its useful life.
It is the expected selling price of a property when
the asset can no longer be used productively by its
owner.
The value is used in accounting to determine
depreciation amounts and in the tax system to
determine deductions.
In economics, commerce or accounting, salvage
value is an important concept.
Calculating salvage value is an important part of
asset management, as well as tax calculation.
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Example 8
The following estimated element costs for a proposed
engineering project are as given in Table. Determine the cost
of the proposed project.
Table
No.
Cost
1 Instrument cost
2 Instrument installation &
Training
3 Operation
&
maintenance cost for the
effective life
4 Indirect cost
5 Opportunity cost for the
land resource

Amount (RM)
25200
5100
22200

20000
10100
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Example 9
A dam has been proposed to build in a hilly remote area to
supply water for agricultural purposes. The cost of construction
(initial cost), if spread out to its effective life, becomes RM 3000
per annum. The operating cost of the project is expected to RM
2000 per annum, and the opportunity cost of the land resources
used for dam construction is about RM 500 per annum. The
yearly water supply capacity of the dam is 5 x 104 m3. The
government has decided to operate the system as no profit no loss principle; that is, the total cost must be recovered from
the sale value of the water. What would be the price of unit
volume of water to satisfy the above condition?

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Some relevant economic terms

GDP (Gross Domestic product)
Gross domestic product (GDP) refers to the market value of
all officially recognized final goods and services produced
within a country in a given period.
GDP is usually calculated on an annual basis.
It is commonly used as an indicator of the economic health
of a country, as well as to gauge a country's standard of
living.
It includes all of private and public consumption, government
outlays, investments and exports less imports that occur
within a defined territory.
Malaysia Gross Domestic Product is worth 278.67 billion US
dollars or 0.45% of the world economy in 2011, according to
the World Bank.
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Gross domestic product (GDP) is calculated as

GDP = C + G + I + NX
where:
C is equal to all private consumption, or consumer
spending, in a nation's economy
G is the sum of government spending
I is the sum of all the country's businesses spending
on capital
NX is the nation's total net exports, calculated as
total exports minus total imports. (NX = Exports Imports).
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GNP (Gross National Product)

GNP is an economic statistic or indicator that includes GDP,
plus any income earned by residents from overseas
investments, minus income earned within the domestic
economy by overseas residents.
GNP = GDP + residents overseas earns overseas
residents earn within country
GNP is a measure of a country's economic performance, or
what its citizens produced (i.e. goods and services) and
whether they produced these items within its borders.
Malaysia Gross National Product is worth 438.25 billion US
dollars in 2011, according to the World Bank.
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Economic Growth Rate

Economic growth rate is a measure of economic growth from
one period to another in percentage terms.

This measure does not adjust for inflation, it is

expressed in nominal terms.

The economic growth rate provides insight into the

general direction and magnitude of growth for the
overall economy.

GDP real growth rate in Malaysia 5.2% (2011)

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