Basic Concepts of

Economics
What is Economics?
What is Economics?
Economics is a science that deals with the
attainment of the maximum fulfilment of
society’s unlimited demands for goods and
services
What is Engineering Economics?
What is Engineering Economics?
Engineering Economics is the branch of
economics that deals with the application
of the laws and theories of economics to
engineering and technical projects
What are Consumer and Producers
Goods and Services?
Consumer goods and services
What are Consumer and Producers
Goods and Services?
Consumer goods and services refer the
products or services that are directly used
by people to satisfy their wants. Examples
are food, clothing, shelter or home, etc.
What are Consumer and Producers
Goods and Services?
Producer goods and services
What are Consumer and Producers
Goods and Services?
Producer goods and services are those that
are used to produce the consumer goods
and services
What is the difference between Necessity
and Luxury?
Necessity
What is the difference between Necessity
and Luxury?
Necessity refers to the goods and services
that are required to support human life,
needs and activities.
What is the difference between Necessity
and Luxury?
Necessity product or staple product
What is the difference between Necessity
and Luxury?
Necessity product or staple product is
defined as any product that has income-
elasticity of demand less than one. This
means that as income rises,
proportionately less income is spent on
such products. Examples include basic
foodstuff like bread and rice, clothing, etc.
What is the difference between Necessity
and Luxury?
Luxuries
What is the difference between Necessity
and Luxury?
Luxuries are those goods and services that
are desired by human and will be acquired
only after all the necessities have been
satisfied.
What is the difference between Necessity
and Luxury?
Luxury product
What is the difference between Necessity
and Luxury?
Luxury product is defined as any product
that has income-elasticity of demand
greater than one. This means that as
income rises, proportionately more income
is spent on such products. Examples
include consumer durables like
appliances, expensive cars, holidays and
entertainment, etc.
What are the different market
situations?
The term market refers to the exchange
mechanism that brings together the sellers
and the buyers of a product, factor of
production or financial security. It may
also refer to the place or area in which
buyers and sellers exchange a well-
defined commodity.
What are the different market
situations?
Buyer or consumer is defined as the basic
consuming or demanding unit of a
commodity. It may be an individual
purchaser of a good or service, a
household (a group of individuals who
make joint purchasing decisions), or a
government.
What are the different market
situations?
Seller is defined as an entity which makes
products, goods or services available to
buyer or consumer in exchange of
monetary consideration.
What are the different market
situations?
Market Situation Sellers Buyers

Perfect Competition many many

Monopoly one many

Monopsony many one

Bilateral Monopoly one one

Duopoly two many

Duopsony many two

Oligopoly few many

Oligopsony many few

Bilateral Oligopoly few few

What are the different market
situations?
Perfect competition refers to the market
situation in which any given product is
supplied by a very large number of
vendors and there is no restriction against
additional vendors from entering the
market.
What are the different market
situations?
Perfect competition is characterized by the
following:
A. Many sellers and many buyers
B. Homogeneous products
C. Free market entry and exit
D. Perfect information
E. Absence of all economic friction
What are the different market
situations?
Monopoly is the opposite of perfect
competition. This market is characterized
by the following:
A. One seller and many buyers
B. Lack of substitute products
C. Blockaded entry
What are the different market
situations?
Natural Monopoly is a market situation
where economies of scales are so
significant that costs are only minimized
when the entire output of an industry is
supplied by a single producer so that
supply costs are lower under monopoly
than under perfect competition and
oligopoly.
What are the different market
situations?
Oligopoly exists when there are so few suppliers of a
product or service that the action of one will
inevitably result in a similar action by the other
suppliers. This type of market is characterized by the
following:
A. Few sellers and many buyers
B. Homogeneous of differentiated products
C. Difficult market entry
What is a Demand?
What is a Demand?
Demand is the need, want or desire for a
product backed by the money to purchase
it. In economic analysis, demand is
always based on “willingness and ability
to pay” for a product, not merely want or
need for the product.
What is a Demand?
The demand for a product is inversely
proportional to the selling price. As the
selling price is increased, there will be less
demand for the product and as the selling
price is decreased, the demand will
increase.
What is a Supply?
What is a Supply?
Supply is the amount of product made available for
sale.

If the selling price for a product is high, more

producers will be willing to work harder and risk
more capital in order to reap more profit. However, if
the selling price of the product declines, capitalists
will not produce as much because of the smaller
profit they can obtain for their labor and risk.
What is a Supply?
Therefore the relationship between price
and supply is that they are directly
proportional. The bigger the selling price,
the more the supply, and the smaller the
selling price, the less the supply.
What is the Law of Supply and Demand?
What is the Law of Supply and Demand?
The Law of Supply and Demand is stated
as follows:
“Under conditions of perfect competition,
the price at which the given product will
be supplied and purchased is the price that
will result in the supply and the demand
being equal.”
 Introduction to
Engineering Economy
ORIGIN OF ENGINEERING ECONOMY
Arthur Mellen Wellington or known as A.M Wellington
was a railway civil engineer of his time. He became
famous because of his book entitled “The Economic
Theory of the Location of Railways” which was published
by John Wiley and Sons in 1887. The book was subtitled
as “an analysis of the conditions controlling the laying
out of railways to effect the most judicious use of capital.
Wellington was later known as the “Father of
Engineering Economy”.

Source: http://mysite.du.edu/~jcalvert/railway/wellingt.htm
Definition of Engineering Economy
Engineering, as defined by the Accreditation Board
for Engineering Technology is “the profession in
which a knowledge of the mathematical and
natural sciences gained by study, experience, and
practice is applied with judgement to develop
ways to utilize, economically the materials and
forces of nature for the benefit of mankind”.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p2
Definition of Engineering Economy
Engineering Economy involves the systematic evaluation of the
economic merits of proposed solutions to engineering problems. To be
economically acceptable, solutions to engineering problems must
demonstrate a positive balance of long-term benefits over long-term
costs, and they must also
• Promote the well-being and survival of the organization
• Embody creative and innovative technology and ideas
• Permit identification and scrutiny of their estimated outcomes
• Translate profitability to the bottom line through a valid and
acceptable measure of merit.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p3
Definition of Engineering Economy
Engineering Economy is the dollars-and-cents side of the
decisions that engineers make or recommend as they work
to position a firm to be profitable in a highly competitive
marketplace.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006). ENGINEERING ECONOMY, 13TH ED.
Pearson-Prentice Hall. p3
Definition of Engineering Economy
Engineering Economy involves formulating, estimating, and
evaluating the expected economic outcomes of alternatives
designed to accomplish a defined purpose. Mathematical
techniques simplify the economic evaluation of alternative.

Source: Blank, L. and Tarquin, A. (2012). ENGINEERING ECONOMY, 7TH ED.

McGraw Hill. P3
Principles of Engineering Economy
#1: DEVELOP ALTERNATIVES
• A decision situation involves making a choice among
two or more alternatives. Developing and defining the
alternatives for detailed evaluation is important
because of the resulting impact on the quality of the
decision.
• Creativity and innovation are essential to the process.
• One alternative that may be feasible in a decision
situation is making no change to the current operation
or set of conditions.
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Principles of Engineering Economy
#2: FOCUS ON THE DIFFERENCES
• Only the differences in the future outcomes of the
alternatives are important. Outcomes that are common
to all alternatives can be disregarded in the comparison
and decision.
• The principle focuses on the engineering economic
analysis of recommending a future course of action
based on the differences among feasible alternatives.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Principles of Engineering Economy
#3: USE A CONSTANT VIEWPOINT
• The prospective outcomes of the alternatives, economic and
other, should be consistently developed from a defined
viewpoint or perspective.
• The perspective of the decision maker, which is often that of
the owners of the firm, would normally be used. However, it is
important that the viewpoint for the particular decision be
first defined and then used consistently in the description,
analysis, and comparison of the alternatives.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Principles of Engineering Economy
#4: USE A COMMON UNIT OF
MEASURE
• Using a common unit of measurement to enumerate as
many of the prospective outcomes as possible will
simplify the analysis of the alternatives.
• It is desirable to make as many prospective outcomes as
possible commensurable.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Principles of Engineering Economy

#5: CONSIDER ALL RELEVANT CRITERIA

• Selection of a preferred alternative requires the use of a
criterion. The decision process should consider both the
outcomes enumerated in the monetary unit and those
expressed in some other unit of measurement or made
explicit in a descriptive manner.
• The decision maker will normally select the alternative
that will best serve the long-term interests of the
owners of the organization.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Principles of Engineering Economy

#6: MAKE RISK AND UNCERTAINTY

EXPLICIT
• Risks and uncertainty are inherent in estimating the
future outcomes of the alternatives and should be
recognized in their analysis and comparison.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Principles of Engineering Economy

#7: REVISIT YOUR DECISIONS

• A good decision-making process can result in a decision
that has an undesirable outcome. Other decisions, even
though relatively successful, will have results
significantly different from the initial estimates of the
consequences.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Engineering Economy and Design
Process
• An engineering economy study is accomplished using a
structured procedure and mathematical modelling
techniques. The economic results are the used in a
decision situation that normally includes other
engineering knowledge and input.
• A sound engineering economic analysis procedure
incorporates the basic principles (7 principles) and
involves several steps.

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Engineering Economy and Design Process

Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p4-6
Application of Engineering Economic Procedure
Sheila bought a small apartment building for
$100,000 in a college town. She spent $10,000 of
her own money for the building and obtained a
mortgage from a local bank for the remaining
$90,000. The annual mortgage payment to the bank
is $10,500. Sheila also expects that annual
maintenance on the building and grounds will be
$15,000. There are four apartments each with two
bedrooms in the building that can each be rented
for $360 per month.
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p13
Application of Engineering Economic Procedure
a. Does Sheila have a problem?
b. What are her alternatives? Identify at least three.
c. Estimate the economic consequences and other required
data for the alternative in part b.
d. Select criterion for discriminating among alternatives and
use it to advise Sheila on which course of action to
pursue.
e. Attempt to analyze and compare the alternatives in view
of at least one criterion in addition to cost.
f. What should Sheila do based on the information you have
generated?
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p13