LECTURE 1

BASIC ECONOMIC
PRINCIPLES, CASH FLOW
DIAGRAM & INTEREST
ESECON230
5:30 – 8:30
BASIC ECONOMIC
PRINCIPLES
 ENGINEERING ECONOMY
 branch of economics which involve the application of
definite laws of economics, theories of investments
and business practices to engineering problems
involving cost.

 Study of economic problems with the concept of

obtaining the maximum benefit at the least cost.
 ENGINEERING ECONOMY
 Study of cost features and other financial data and
their applications in the field of engineering as bases
for decision.
 ENGINEERING ECONOMY: APPLICATION

1. Seeking New Objectives for the Application of Engineering

2. Discovery of Factors Limiting the Success of a Venture or Enterprise
3. Comparison of Alternatives as a Basis for Decision
4. Analysis of Possible Investment of Capital
5. Determination of Bases for Decision
BASIC TERMS AND PRINCIPLES
TANGIBLE FACTORS
- Are those which can be expressed in term of monetary factors

INTANGIBLE FACTORS
- Are those which are difficult or impossible to express definitely in
terms of monetary values
- Also called irreducible factors
PERFECT COMPETITION
- occurs when a certain product is offered for sale by many vendors and
suppliers, and there is no restriction against other vendors from entering
the market.

MONOPOLY - is the opposite of perfect competition.

- occurs when a unique product or services is available only from a
single supplier and entry of all other possible suppliers is prevented.

OLIGOPOLY
- occurs when there are few suppliers and any action taken by anyone of
them will definitely affect the course of action of the others.
 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
PRICE
- What must be paid to acquire the right to posses and use a good or
service
- Price therefore regulates production. If prices go up, production will
increase. If price decrease, production will also decrease or cease.
MARKET
- place where buyers and sellers come together
- A limited locality where certain goods such as those which are
perishable are sold, is said to be a local market.
- Certain goods sold all over the country are said to have a national
market.
- Goods that are exported to other countries are said to have a world
market.
CONSUMER GOODS OR SERVICES
- are those that are consumed or used directly with people, or are things
and services which serves to satisfy human needs.

PRODUCER GOODS AND SERVICES

- are those which produce goods and services for human consumption.
NECESSITIES
- products or services that are required to support human life and
activities
- will be purchased in somewhat the same quantity even though prices
varies

LUXURIES
- products or services that are desired by human
- will be purchased if money is available after the required necessities
have been obtained
DEMAND
- quantity of a certain commodity that is bought at a certain price at a
given place and time
- refers to how much (quantity) of a product or services is desired by
buyers

SUPPLY
- quantity of a certain commodity that is offered for sale at certain price
at a given place and time
- represent how much the market can offer
LAW OF DEMAND
- states that the demand for a commodity varies inversely as the price
of the commodity, though not proportionately

- When the price of commodity is low, the demand is great. However,

as the price increases, the demand decreases.

-  price =  demand;  price =  demand

Elastic Demand
- occurs when a decrease in selling price will cause a greater than
proportionate increase in the volume of sales.

Inelastic Demand
- occurs when a decrease in selling price will cause a less than
proportionate increase in sales.

Unitary Elasticity of Demand

- occurs when the mathematical product of price and volume of sales
remains constant regardless of any change in price
PV = C
LAW OF SUPPLY
- states that the supply of the commodity varies directly as the price of
the commodity, though not proportionately

- As the price increases the supply also increases. Likewise, as the price
decreases, the supply will also decrease.

-  price =  demand;  price =  demand

LAW OF SUPPLY AND DEMAND

- states that under conditions of perfect competition the price at which a

given product will be supplied and purchased is the price that will
result in the supply and the demand being equal

- allocations of goods is at its most EFFICIENT

LAW OF SUPPLY AND DEMAND
LAW OF DIMINISHING RETURN

- states that when one of the factors of production is fixed in quantity or

is difficult to increase, increasing the other factors of production will
result in a less than proportionate increase in output
PHYSICAL AND ECONOMIC EFFICIENCY

1. EFFICIENCY = output/input
2. PHYSICAL EFFICIENCY = output in physical units /
input in physical units
3. ECONOMIC EFFICIENCY = Income in Pesos / Cost in
Pesos
4. RATE OF RETURN = Annual Net profit / Capital
Invested
5. PAYOUT PERIOD = Capital Invested / Net Annual Cash
Flow
CASH FLOW
DIAGRAM
CASH FLOW DIAGRAM
- graphical representation of cash flow drawn on a
time scale. Cash flow diagram for economics
analysis problems is analogous to that of free body
diagram (FBD) for mechanics

CASH FLOW
- difference between total cash coming (inflows or
cash receipt) and total cash going out (outflows or
cash disbursement) for a given period of time
CASH FLOW DIAGRAM ELEMENTS
1. HORIZONTAL LINE – time scale, with progression of time moving from left to right
divided into equal periods such as days, months or years

2. ARROWS – signify cash flows and are placed at the end of the period

receipt (positive cash flow) disbursement (negative cash flow or cash outflow

3. POINT OF VIEW – lender versus borrower view point

CASH FLOW DIAGRAM

P150 P100

0 1 2 3 4 5 0 1 2 3 4 5

P100 P150

Lender’s POV Borrower’s POV

INTEREST
INTEREST - amount of money paid for the use of borrowed
capital or the income produced by money which has been loaned
SIMPLE INTEREST - is calculated using the principal
only, ignoring any interest that had been accrued in preceding periods
PRINCIPAL - the amount of money earned by one unit of
principal during a unit of time
SIMPLE INTEREST

𝐼=𝑃𝑛𝑖(1)
𝐼=𝑖𝑛𝑡𝑒𝑟𝑒𝑠𝑡
SIMPLE INTEREST
1. Suppose that P1,000 is borrowed at a simple interest rate of 18% per annum. At
the end of one year, the interest would be

Given:
Sol’n:
P = P1,000
I = Pni
n= 1 year
I = (P1,000) (1) (0.18)
i= 18% per annum
I = P 180
Req’d: I=?
ORDINARY SIMPLE INTEREST
- Computed on the basis of 12 months of 30 days each or 360 days
a year
𝐼=𝑃 ( 𝑑
360 ) 𝑖(3 )

EXACT SIMPLE INTEREST

- Computed based on the exact number of days in a year

𝐼 =𝑃 ( 𝑑
365 )
𝑖( 4 ) 𝐼 =𝑃 ( 𝑑
366 )
𝑖(5 )

Ordinary year Leap year

2. Determine the ordinary & exact simple interest on P5,000 for the period from Jan. 15 to
June 20, 2017. if the rate of simple interest is 14%

Given:
P = P5,000
n= Jan. 15 to June 20, 2017
i= 14%

Req’d: I=? (ordinary and exact interest)

2. Determine the ordinary & exact simple interest on P5,000 for the period from Jan. 15 to
June 20, 2017. if the rate of simple interest is 14%
Sol’n:
Jan 15 – Jan 31 = 16 days (excluding Jan 15)
Feb 1 – Feb 28 = 28 days
March 1 – March 31 = 31 days
April 1 – April 30 = 30 days
May 1 – May 31 = 31 days
June 1 – June 20 = 20 days
d = 156 days

Ordinary Intertest Exact interest

2. Determine the ordinary & exact simple interest on P5,000 for the period from Jan. 15 to
June 20, 2017. if the rate of simple interest is 14%
Sol’n:
d = 156 days

Ordinary Interest Exact Interest

I = P303.33 I = P299.18
3. What will be the future worth of the money after 14 months, if a sum of P10,000 is
invested today at a simple interest rate of 12% per year?

Given:
P = P10,000 Sol’n:
n= 14 months
i= 12% per annum

Req’d: F=?
4. If you borrow money from your friend with simple interest of 12%, find the present
worth of P20,000, which is due at the end of 9 months?

Given:
F = P20,000 Sol’n:
n= 9 months
i= 12% per annum

Req’d: P=?
COMPOUND INTEREST – the interest for an
interest period is calculated on the principal plus total amount of
interest accumulated in previous periods
- “interest on top of interest”
Interest Principal @ Beginning of Interest Earned During Amount at End of Period
Period Period Period
1

n
COMPOUND INTEREST
𝐹 = 𝑃 (1+𝑖)𝑛
(1+𝑖)𝑛 − 𝑠𝑖𝑛𝑔𝑙𝑒   𝑝𝑎𝑦𝑚𝑒𝑛𝑡   𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑   𝑎𝑚𝑜𝑢𝑛𝑡   𝑓𝑎𝑐𝑡𝑜𝑟

−𝑛
𝑃 = 𝐹 (1+𝑖)

(1+𝑖)−𝑛 − 𝑠𝑖𝑛𝑔𝑙𝑒   𝑝𝑎𝑦𝑚𝑒𝑛𝑡   𝑝𝑟𝑒𝑠𝑒𝑛𝑡   𝑤𝑜𝑟𝑡h   𝑓𝑎𝑐𝑡𝑜𝑟

THANK YOU!
ESECON230
5:30 – 8:30