THE ECONOMIC

ENVIRONMENT
Engineering economy

• 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.
Consumer /Producer Goods,
Necessities& Luxuries, Demand
• Consumer and Producer Goods and Services
- Consumer Goods are those 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 and Luxuries
- are those 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
Consumer /Producer Goods,
Necessities& Luxuries, Demand

• Demand
• - is 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 result in a greater than proportionate increase
in sales.
Inelastic Demand – occurs when a decrease in the
selling price produces a less than proportionate increase
in sales.
Unitary Elasticity of Demand – occurs when the
mathematical product of volume and price is
constant.
Competition, Monopoly and
Oligopoly
• 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
the market.
• 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
- 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.
The Law of Supply and
Demand
• The Law of Supply and Demand

Supply is the quantity of a certain commodity that is

offered for sale at a certain price at a given place and
time.

The law of supply and demand may be stated as follows:

“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.”
The Law of Diminishing
Returns
The Law of Diminishing Returns states that:

“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 AND MONEY TIME
RELATIONSHIPS
• Interest – is the 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. In practice,
simple interest is paid on short – term loans in which the time
of the loan is measured in days.
(a) Ordinary simple interest is computed on the basis of 12
months of 30 days each or 360 days a year
1 interest period = 360 days
INTEREST AND MONEY TIME
RELATIONSHIPS
(b) Exact simple interest is based on the exact number of
days in a year, 365 days for an ordinary year and 366 days for a
leap year.
1 interest period = 365 or 366 days

Problems:
1.Determine the ordinary simple interest on P700 for 8 months and 15 days if
the rate of interest is 15%
2.Determine the exact simple interest on P500 for the period from January 10
to October 28, 1996 at 16% interest
3.What will be the future worth of money after 14 months, if a sum of P10,000
is invested today at a simple interest rate of 12% per year?
INTEREST AND MONEY TIME
RELATIONSHIPS
• Cash Flow Diagrams

- a cash-flow diagram is simply a graphical representation

of cash flows drawn on a time scale. Cash-flow diagram
for economic analysis problems is analogous to that of
free body diagram for mechanics problems.

Receipt – positive cash flow or cash inflow

Disbursement – negative cash flow or cash outflow
• A loan of P100 at simple interest of 10% will become P150
after 5 years.

Cash flow diagram on the viewpoint of the lender

Cash flow diagram on the viewpoint of the borrower

INTEREST AND MONEY TIME
RELATIONSHIPS
• Compound Interest
- in calculations of compound interest, the interest for
an interest period id calculated on the principal plus total
amount of interest accumulated in previous periods.
- it means “interest on top of interest”
INTEREST AND MONEY TIME
RELATIONSHIPS
F = P (1+i)n
•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. Thus,
F = P (F/P, i%, n)
The symbol F/P, i%, n is read as “F given P at i percent in n
interest periods.”
P = F(1+i)-n
The quantity (1+i)n is called the “single payment present worth
factor” and is designated by the functional symbol P/F, i%, n.
Thus,
P = F(P/F, i%, n)
The symbol P/F , i%, n is read as “P given F at i percent in n
interest periods ”
INTEREST AND MONEY TIME
RELATIONSHIPS

Where: i = rate of interest per interest period

r = nominal interest rate
m = number of compounding periods per year
INTEREST AND MONEY TIME
RELATIONSHIPS