Engineering Economics

 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.
 Goods and Services
o Consumer goods and services
- are those products or services that are directly used by people to satisfy their wants.
o Producer goods and services
- are used to produce consumer goods and services or other producer goods.
 Necessities and Luxuries
o Necessities
- are those products or services that are required to support human life and activities.
o 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.
 Demand and Supply
o Demand
- is the amount of goods or service that customers want to buy. The quantity of a certain
commodity that is bought at a certain price at a given place and time.
- The law of demand holds that demand for a product change inversely to its price, all else being
equal. In other words, the higher the price, the lower the level of demand.
o Supply
- is the amount of a specific good or service that's available in the market.
- The law of supply relates price changes for a product with the quantity supplied. In contrast with
the law of demand the law of supply relationship is direct, not inverse. The higher the price, the
higher the quantity supplied.
 Equilibrium Price (market-clearing price)
- is the price at which demand matches supply, producing a market equilibrium acceptable to buyers
and sellers.
 Market
o 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.
o 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.
 o Oligopoly
- exists when there are so few suppliers of a product or service that action by one will almost
inevitably result in similar actions by the others.
 Law of Diminishing Returns
- “When the use of one of the factors of production is limited, either in increasing cost or by absolute
quantity, a point will be reached beyond which an increase in the variable factors will result in a less
than proportionate increase in output.”
 Interest
- is the amount of money paid for the use of borrowed capital or the income produced by money
which has been loaned. Mathematically, it is the difference between an ending amount of money and
the beginning amount.
 Interest Rate
- When interest paid over a specific time unit is expressed as a percentage of the principal
 Cash Flow

 Simple Interests
o Simple interests
- is calculated using the principal only, ignoring any interests that had been accrued in preceding
periods.
o Ordinary simple interests
- is computed based on 12 months of 30 days or 360 days a year.
o Exact simple interests
- is based on the exact number of days in a year, 365 days in an ordinary year and 366 for a leap
year.
 Compound Interests
- The interests for an interest period are calculated on the principal plus total amount of interest
accumulated in the previous period.
- The quantity (1+i)n is commonly called the “single payment compound amount factor” and is
designated by the functional symbol F/P, i%, n
 o Discrete Compounding
- The interest is compounded at the end of each finite – length period, such as month, a quarter
or a year.
o Continuous Compounding
- It is assumed that cash payments occur once per year, but the compounding is continuous
throughout the year.
 Interest Rates
o Nominal rate of interest
- specifies the rate of interest and a number of interest periods in one year.
o Effective rate of interest
- is the actual interest or exact rate of interest on the principal during one year.

Annuities
 Inflation
- is the increase in the prices for goods and services from one year to another, thus decreasing the
purchasing power of money.
 Annuity
- is defined as a series of equal payments occurring at equal intervals of time. When an annuity has a
fixed time span, it is known as annuity certain. Annuities are established for the following purposes:
1. As payment of a debt by a series of equal payments at equal time intervals, also known as
amortization.
2. To accumulate a certain amount in the future by depositing equal amounts at equal time
intervals. These amounts are called sinking fund.
3. As a substitute periodic payment for a future lump sum payment.
o Types of Annuities
 Ordinary Annuity
- is one where the payments are made at the end of each period.
 Annuity Due
- is one where the payments are made at the beginning of each period.
 Deferred Annuity
- is one where the first payment is made several periods after the beginning of the
annuity.
 Perpetuity
- when an annuity does not have a fixed time span but continuous indefinitely. The sum
of perpetuity is an infinite value.
 Capitalized Cost
- The capitalized Cost of any property is the sum of the first cost and the present worth of all costs of
replacement, operation, and maintenance for a long time or forever.
 o Case 1: No replacement, only maintenance and or operation every period.
o Case 2: Replacement Only, no maintenance and/or operation.
o Case 3: Replacement, Maintenance and or operation every period.
 Amortization
- is any method of repaying a debt, the principal and interest included, usually by a series of equal
payments at equal intervals of time.
 Arithmetic Gradient Series
- is a cash flow series that either increases or decreases by a constant amount each period. The
amount of change is called the gradient.
 Geometric Gradient Series
- is a cash flow series that either increases or decreases by a constant percentage each period. The
uniform change is called the rate of change.