UNIVERSITY OF SOUTHERN MINDANAO

KIDAPAWAN CITY CAMPUS

Sudapin, Kidapawan City

ENGINEERING ECONOMICS

REYMART JAY G. ADAYA, RMEE

College of Engineering

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 TOPIC 1

DEFINITION AND BASIC

CONCEPTS

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 Definition and Basic Concepts

Engineering Economics is a subject of

economics for engineering projects
primarily in performing analysis,
evaluation, synthesizing, and resulting in a
decision.

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 Definition and Basic Concepts

These decisions involve using elements of

cash flows of money, time, and interest
rates.

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 Definition and Basic Concepts

Produce products and services

PHYSICAL depending on the physical law.
ENVIRONMENT (e.g., Newton’s Law, Thermodynamics,
etc.)

ENGINEERING

ECONOMIC Evaluating the worth of these products/

ENVIRONMENT services in economic term.
Economic Viability

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 Definition and Basic Concepts

Economics
deals with the behavior of people, and as
such, economic concepts are usually qualitative
in nature, and not universal in application.

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 Definition and Basic Concepts

Commodity
: basic good used in commerce that is interchangeable with other
commodities of the same type.
: most often used as inputs in the production of other goods or
services.

Utility
: power of a good or service to satisfy human needs.

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 Definition and Basic Concepts
Value
: designates the worth that a person attaches to an object or service.
: measure or appraisal of utility in some medium of exchange.
: not the same as cost or price.

Need
: basic requirement for survival (food, clothing, shelter).

Want
: way of expressing a need.
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 Definition and Basic Concepts

Scarcity
: condition that results from not having enough resources.

Capital
: tools, equipment, machinery, and factories used in the
production of goods and services.

Labor
: people with all their efforts, abilities, and skills.
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 Definition and Basic Concepts
Gross Domestic Product (GDP)
: currency value of all final goods and services, and structures produced
within a country’s borders, in a 12-month period.

Economic Products
: goods and services that are useful, relatively scarce, and transferable to
others.

Good
: item that is economically useful or satisfies economic want.

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 Definition and Basic Concepts
Service
: work that is performed for someone.

Consumer goods
: goods and services that directly satisfy human wants. (TV, shoes, houses,
etc.)

Producer goods
: goods and services that satisfy human wants indirectly as a part of the
production or construction process. (factory equipment, industrial chemicals,
and materials)
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 Definition and Basic Concepts

Business
Ownership Liability Taxes
Structure
Unlimited personal Personal Tax Only
Sole Proprietorship One Person
liability
Unlimited personal Self-employed tax
Partnership Two or more people liability unless structured (except for limited
as a limited partnership partners)

Corporation Consists of at least 5 to

15 incorporators each of Liability of the
whom must hold at least shareholders of a In general, on net
a. Stock Corporation one share and must be corporation is limited to income from all sources
registered with the the amount of their is 30%.
Securities and Exchange share capital
b. Non-stock Corp. Commission (SEC) Exempted

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 Definition and Basic Concepts

Classification of Cost
First (or Initial Cost) Cost to get an activity started such as property
improvement, transportation, installation and
initial expenditures.
Operation and Maintenance Continuous over the useful life of the activity
Cost Ex: regular maintenance, repair, spare parts, and
administration
Fixed Cost Cost that do not change when the quantity
of output changes.
Ex: amortization, depreciation, insurance,
interest expense, property taxes, rent,
salaries, utilities
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 Definition and Basic Concepts

Classification of Cost
Variable Cost Cost which varies with changes in the activity level of
business.
Ex: direct materials, piece rate labor, and
commissions/bonus
Incremental or Marginal Cost Additional expense that will be incurred from increased
output in on or more system units, i.e. production
increase.
Sunk Cost  Money that is already spent and permanently
lost.
 Past opportunity costs that partially salvage or
irretrievable and, therefore, should be
considered irrelevant to future decision
making.
USMKCC-COL-F-016  Also called embedded cost, prior year cost, 14
stranded cost, or sunk capital
 Definition and Basic Concepts

Classification of Cost
Life-Cycle Cost Cost for the entire life-cycle of a
product, and includes feasibility,
design, construction, operation and
disposal cost.

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 Definition and Basic Concepts

Market
any arrangement that
enables buyers and sellers
to get information and do
business with each other.

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 Definition and Basic Concepts

Competitive Market
a market that has many buyers and many sellers
so no buyer or seller can influence the price.

Money
an accepted payment for goods and services.
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 Definition and Basic Concepts
Currency
money in any form when in actual use or circulation as a
medium of exchange or payment.

Relative Price
ratio between any two prices or the ratio between the
price of one particular good and a weighted average of all
other goods available in the market. Relative Price is an
opportunity cost.
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 Definition and Basic Concepts

Types of Market Structure

Monopoly Characteristics:
• Profit maximizer
(Single Seller) • Price Maker: decides the price of
the good or product to be sold,
A sector or industry but does so by determining the
dominated by one quantity to demand the price
corporation, firm or desired by the firm
• High Barriers: other sellers are
entity. unable to enter the market
• Price Discrimination

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 Definition and Basic Concepts

Types of Market Structure

Monopsony An example is the government
(Single Buyer) which is a natural monopsony in
buying the different services and
products for the public.
Monopoly- The quantity sold and the price
Monopsony will be a function of the
(One Buyer, One negotiation between the buyer
Seller) and seller.

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 Definition and Basic Concepts

Types of Market Structure

Duopoly A form of oligopoly where only two
(Two Sellers)
sellers exist in one market.

Oligopoly
(Few Sellers) Only few market producer.

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 Definition and Basic Concepts

Types of Market Structure

Perfect Features low barriers to entry,
Competition identical products with no
differentiation, an unlimited number
of producers and consumers, and a
perfectly elastic demand curve.

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 Definition and Basic Concepts

Summary of Market Structure

Market Seller Entry Number of Buyer Entry Number of
Structure Barriers Seller Barriers Buyer
Perfect Competition NO MANY NO MANY
Monopoly YES ONE NO MANY
Duopoly YES TWO NO MANY
Oligopoly YES FEW NO MANY
Monopsony NO MANY YES ONE
Oligopsony NO MANY YES FEW
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 Definition and Basic Concepts
Price Comparison Based on Market Form

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 Definition and Basic Concepts

Law of Demand
“ If other things remain
the same, the higher the price
of a good, the smaller is the
quantity demanded; and the
lower the price of a good, the
larger is the quantity demanded.”

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 Definition and Basic Concepts

Supply & Demand

Curve

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 Definition and Basic Concepts
Price Elasticity of Demand
measure of the relationship between a change in the quantity
demanded of a particular good and a change in its price.
is often used to discuss price sensitivity.
A decrease in selling price results in
Elastic Demand greater than proportionate increase in
sales
A decrease in selling price produces a less
Inelastic Demand
than proportionate increase in sales
The mathematical product of volume and
Unitary Elasticity of Demand
price is constant

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 Definition and Basic Concepts
Law of Diminishing Return
“In a production process, as one input variable is increased, there will be a
point at which the marginal per unit output will start to decrease, holding all
other factors constant.”

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 Definition and Basic Concepts
6 main factors that change demand decisions:

 Prices of related goods

 Expected future prices
 Buyers’ income
 Expected future income and credit
 Population
 Preferences
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