ENGINEERING

ECONOMY
By: Hipolito Sta. Maria &
Jesus N. Matias

Prepared and
Presented by: ENGR. CZARNEL ALEXIS L. ULEP
 Introduction to
Engineering Economy
Chapter 1
Definition
It is an engineering discipline mainly
concerned with the mathematical
analysis and evaluation of cost and
benefits of proposed or on going
business projects and ventures, with
the aim of making cost-effective
decisions for such projects and
ventures, thus ensuring the best use
of capital.
Principles of Engineering Economy
Among the decisions that engineers are called upon to make
involve, but are not limited to the following:
a) Deciding to implement a new project or venture
b) Selecting among alternative projects or ventures that
must be implemented within a capital budget limit
c) Selecting between alternative technical designs for a
component, product, structure, system, service or process
d) Analyzing the economic impact of engineering
improvements or modifications on an existing product,
system or process
e) Deciding whether and when to replace existing equipment
f) Deciding whether to lease or purchase equipment to
improve an existing operation
Principles of Engineering
Economy
The analytical methods of engineering economy
make use of the CASH FLOW APPROACH.
• The analysis mainly consist of predicting or
analyzing the economic effects of a project or
venture, or of various alternatives in terms of
cash money to be spent and received by the
project or venture, or as result of each
alternative being implemented.
• The economic feasibility of a project or venture
or an alternative is determined by calculating if
or which alternative has economic benefits best
outweighing economic costs.
Engineering Economy and the
Design Process
The discipline of engineering economy
is primarily meant to aid business
organization determine feasible
projects, ventures or alternatives that
they can implement, with the
assurance that capital is allocated and
invested wisely with defined monetary
(an non-monetary benefits).
Engineering Economy and the
Design Process
It is also meant to aid engineering
designers in evaluating the economic
costs and benefits of their designs of a
new component, product, structure,
system, service or process; or designs
of engineering improvements or
modifications on an existing product,
system or process.
Concepts of Economics
• Price
- The amount of money or its equivalent
which can be given in exchange for a
product or a service
• Market
- The place where sellers and buyers of
products and services come together to
make transactions
Concepts of Economics
Types of Market
Market Seller Buyer
Perfect Many Many
Competition
Monopoly One Many
Monopsony Many One
Duopoly Two Many
Duopsony Many Two
Oligopoly Few Many
Oligopsony Many Few
Bilateral One One
Monopoly
Bilateral Few Few
Oligopoly
Concepts of Economics
• Consumer Goods and Services
- 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
- 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
- Products or services that are desired by humans and will
be purchased only if money is available after the required
necessities have been obtained.
Concepts of Economics
• Demand
- The quantity of a certain commodity that is bought
at a certain price at a given place and time.
• Elastic Demand
- Occurs when a decrease in selling price results in a
greater than the proportionate increase in sales.
• Inelastic Demand
- Occurs when a decrease in selling price results in a
less than proportionate increase in sales.
• Unitary Elasticity of Demand
- Occurs when the mathematical product of volume
and price is constant.
Concepts of Economics
Law of Demand
Concepts of Economics
Elastic and Inelastic Demand Curve
Concepts of Economics
• Supply
- Is the quantity of a certain commodity
that is offered for sale at a certain price
at a given place and time.
Law of Supply
Concepts of Economics
Law of Supply and Demand
Concepts of Economics
The Law of Diminishing Returns
Cost Concepts for Engineering
Economy Analysis
Three COST ELEMENTS:
A. Materials
B. Labor
C. Overhead
Cost Concepts for Engineering
Economy Analysis
Material Cost
• Direct Materials
- Materials that are used directly in the
finished product itself.
• Indirect Materials
- Materials that used in facilitating the
production process, but are not used in
the finish product.
Cost Concepts for Engineering
Economy Analysis
Labor Cost
• Direct Labor
- Labor applied directly to the production
of the product.
• Indirect Labor
- Labor that is used to facilitate the
production process, but cannot be
indentified with a specific product
produced.
Cost Concepts for Engineering
Economy Analysis
Overhead
- All other expenses necessary for the operation of
the business enterprise, but cannot be classified
as direct material cost or direct labor cost, may
include but are not limited to the following:
Examples:
• Indirect Materials
• Indirect labor
• Depreciation
• Taxes
Cost Concepts for Engineering
Economy Analysis
• Insurance
• Rental
• Supervision
• Maintenance
• Utilities (power, water, communication)
• Office Supplies
• Fuel, oil and lubricants
• Equipment repair
Cost Concepts for Engineering
Economy Analysis
• Warehousing and delivery
• Transportation
• Marketing
• Government permits
• Professional fees
Cost Concepts for Engineering
Economy Analysis
• Distribution according to the cost of
direct materials
- The estimated overhead expense for a
certain product is directly proportional to
the direct materials cost of the product.
• Distribution according to the cost of
direct labor
- The estimated overhead expense for a
certain product is directly proportional to
the direct labor cost of the product.
Cost Concepts for Engineering
Economy Analysis
• Distribution according to the number of direct
labor hours
- The estimated overhead expense for a certain
product is directly proportional to the number of
direct labor hours spent on the product.
• Distribution according to the number of used
equipment hours
- Is derived by calculating the total overhead for a
production process in a given time period and
dividing it by the total equipment-hours for all the
equipment in that process for the same period.