ENGINEERING

ECONOMY
By: Hipolito Sta. Maria &
Jesus N. Matias
Introduction to Engineering
Economy
Chapter 1
Definition
It is an engineering discipline mainly concerned
with the mathematical analysis and evaluation of
cost and benefits of proposed or on going
business projects and ventures, with the aim of
making cost-effective decisions for such projects
and ventures, thus ensuring the best use of capital.
Principles of Engineering Economy
Among the decisions that engineers are called upon to make
involve, but are not limited to the following:
a) Deciding to implement a new project or venture
b) Selecting among alternative projects or ventures that must be
implemented within a capital budget limit
c) Selecting between alternative technical designs for a component,
product, structure, system, service or process
d) Analyzing the economic impact of engineering improvements
or modifications on an existing product, system or process
e) Deciding whether and when to replace existing equipment
f) Deciding whether to lease or purchase equipment to improve an
existing operation
Principles of Engineering Economy
The analytical methods of engineering economy make
use of the CASH FLOW APPROACH.
• The analysis mainly consist of predicting or
analyzing the economic effects of a project or
venture, or of various alternatives in terms of cash
money to be spent and received by the project or
venture, or as result of each alternative being
implemented.
• The economic feasibility of a project or venture or
an alternative is determined by calculating if or
which alternative has economic benefits best
outweighing economic costs.
Engineering Economy and the Design
Process
The discipline of engineering economy is
primarily meant to aid business organization
determine feasible projects, ventures or
alternatives that they can implement, with
the assurance that capital is allocated and
invested wisely with defined monetary (an
non-monetary benefits).
Engineering Economy and the Design
Process
It is also meant to aid engineering designers in
evaluating the economic costs and benefits of
their designs of a new component, product,
structure, system, service or process; or designs of
engineering improvements or modifications on an
existing product, system or process.
Concepts of Economics
• Price
- The amount of money or its equivalent which can
be given in exchange for a product or a service
• Market
- The place where sellers and buyers of products and
services come together to make transactions
Concepts of Economics
Types of Market
Market Seller Buyer
Perfect Competition Many Many
Monopoly One Many
Monopsony Many One
Duopoly Two Many
Duopsony Many Two
Oligopoly Few Many
Oligopsony Many Few
Bilateral Monopoly One One
Bilateral Oligopoly Few Few
Concepts of Economics
• Consumer Goods and Services
- Products or services that are directly used by people to satisfy
their wants.
• Producer Goods and Services
- Are used to produce consumer goods and services or other
producer goods.
• Necessities
- 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.
• Luxuries
- Products or services that are desired by humans and will be
purchased only if money is available after the required
necessities have been obtained.
Concepts of Economics
• Demand
- The quantity of a certain commodity that is bought at a
certain price at a given place and time.
• Elastic Demand
- Occurs when a decrease in selling price results in a
greater than the proportionate increase in sales.
• Inelastic Demand
- Occurs when a decrease in selling price results in a less
than proportionate increase in sales.
• Unitary Elasticity of Demand
- Occurs when the mathematical product of volume and
price is constant.
Concepts of Economics
• Supply
- Is the quantity of a certain commodity that is
offered for sale at a certain price at a given place and
time.
Law of Supply and Demand
“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”
Law of supply and demand Graph
Concepts of Economics
 Concepts of Economics

The 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”
Concepts of Economics
The Law of Diminishing Returns
 Cost Concepts for Engineering
Economy Analysis
Three COST ELEMENTS:
Materials
Labor
Overhead
Cost Concepts for Engineering
Economy Analysis
Material Cost
• Direct Materials
- Materials that are used directly in the finished
product itself.
• Indirect Materials
- Materials that used in facilitating the production
process, but are not used in the finish product.
Cost Concepts for Engineering
Economy Analysis
Labor Cost
• Direct Labor
- Labor applied directly to the production of the
product.
• Indirect Labor
- Labor that is used to facilitate the production
process, but cannot be identified with a specific
product produced.
Cost Concepts for Engineering
Economy Analysis
Overhead
- All other expenses necessary for the operation of the
business enterprise, but cannot be classified as direct
material cost or direct labor cost, may include but are
not limited to the following:
Examples:
• Indirect Materials
• Indirect labor
• Depreciation
• Taxes
Cost Concepts for Engineering
Economy Analysis
• Insurance
• Rental
• Supervision
• Maintenance
• Utilities (power, water, communication)
• Office Supplies
• Fuel, oil and lubricants
• Equipment repair
Cost Concepts for Engineering
Economy Analysis
• Warehousing and delivery
• Transportation
• Marketing
• Government permits
• Professional fees
Cost Concepts for Engineering
Economy Analysis
• Distribution according to the cost of direct
materials
- The estimated overhead expense for a certain
product is directly proportional to the direct
materials cost of the product.
• Distribution according to the cost of direct
labor
- The estimated overhead expense for a certain
product is directly proportional to the direct labor
cost of the product.
Cost Concepts for Engineering
Economy Analysis
• Distribution according to the number of direct
labor hours
- The estimated overhead expense for a certain product is
directly proportional to the number of direct labor
hours spent on the product.
• Distribution according to the number of used
equipment hours
- Is derived by calculating the total overhead for a
production process in a given time period and dividing it
by the total equipment-hours for all the equipment in
that process for the same period.