Module 1: Economic Environment

Definition of Terms
• Economics
– It is one of the social sciences, which consists of
that body of knowledge dealing with people
and their assets or resources.
– It is a social science that analyzes the
production, distribution and consumption of
goods and services.
 Definition of Terms
• Resource
– It is a material or asset that is transformed to produce
benefit, and in the process may be consumed or made
unavailable.
• Asset
– It is anything tangible or intangible that is capable of
being owned or controlled to produce value.
– It is anything that represents value of ownership that
can be converted into cash.
 Definition of Terms
• Engineering Economy
– It is defined as that branch of Economics which involves
the applications of the laws of Economics, theories of
investment, and business practices to engineering
problems involving cost.
– It may also be considered as a study of economic
theories and their applications to engineering problems
with the concept of obtaining maximum benefit at the
least cost.
 Definition of Terms
• Engineering Economy
– It involves the study of cost features and other financial
data and their applications in the field of engineering as
a basis for decision.
– It 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.
Importance of Engineering Economy
• Discovery of factors limiting the success of a
venture or enterprise
• Comparison of alternatives as a basis for decision
• Analysis of possible investments of capital
• Determination of bases for decision
Importance of Engineering Economy
• Engineers DESIGN things and perform
PROJECTS.
– They must be concerned with the economic
aspects of their designs and projects.
 Example
• Miss A is a president of a business. She
travels to different countries weekly to meet
with possible investors. Due to her frequent
commercial airline trips, she is considering
to purchase a plane.
 Possible Questions
• How much will it cost each year?
– Maintenance, Staff etc.
• How do she pay for it?
– Cash, installment
• Which option is more cost-effective?
• What is the expected rate or return?
 How can we answer these questions?

• By using specific mathematical relationships

• Comparing alternatives
The Economic Environment
Terms and Principles of Economics

Goods

Consumer Producer
Goods Goods
 Terms and Principles of Economics
• Consumer Goods
– These are goods that are consumed or are used
directly by people, or are things and services
which serve to satisfy human needs.
 Terms and Principles of Economics
• Producer Goods
– Producer goods are those that produce goods and
services for human consumption, such as electric
motors, generators, tools, concrete mixers, buses,
airplanes and ships, among others.
 Terms and Principles of Economics
• Necessities
– These are 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.
 Terms and Principles of Economics
• Luxuries
– These are products or services that are desired
by humans and will be purchased if money is
available after the required necessities have
been obtained.
 Terms and Principles of Economics
• Supply

– It is the quantity of a certain commodity that

is offered for sale at a certain price at a
given place and time.
 Terms and Principles of Economics
• Demand

– It is the quantity of a certain commodity that

is bought at a certain price at a given place
and time.
 Elasticity of Demand
• Elastic Demand
– It occurs when a decrease in selling price will
cause a greater than proportionate increase in
the volume of sales.
– Goods which are considered luxuries are said to
have elastic demand because a small decrease
in cost will usually result in big increase in sales.
 Elasticity of Demand
• Inelastic Demand
– It occurs when a decrease in selling price will
cause a less than proportionate increase in the
volume of sales.
– Goods which are classified as necessities usually
have inelastic demand because even a big
decrease in selling price will not cause a big
increase in the volume of sales.
 Elasticity of Demand
• Unitary Elasticity of Demand
– It occurs when the mathematical product of
volume and price is constant.
– Thus,
PV = C
where: P = price of the product
V = volume of sales, and
C = constant
 Law of Demand

• “The demand for a commodity varies

inversely as the price of the commodity,
though not proportionally.”
Price-Demand Relationship
 Price-Demand Relationship
• For necessities and luxuries
 Law of Supply

• “The supply of a commodity varies directly as

the price of the commodity, though not
proportionally.”
Price-Supply Relationship
 Law of Supply and Demand

• “When free competition exists, the price of a

product will be that value where supply is
equal to the demand.”
Price-Supply-Demand Relationship
 Perfect Competition

• 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 in the market.
 Monopoly

• 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.
 Oligopoly
• 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.