Engineering

Economics
Engr. Joseph D. Retumban

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Engineering
Economics
Engineering economics is the engineering
discipline that is mainly concerned with
mathematical analysis and evaluation of
cost and benefits of proposed ongoing
business project and ventures with the aim
of making cost effective decisions for such
project and ventures, thus ensuring the best
capital.

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Engineering
Economics
Engineering economics 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 ensure the best use of capital.

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Principles
1. Deciding to implement a new project.

2. Selecting among alternative projects that

must be implemented within the capital limit.

3. Selecting between alternative technical

designs for component, product, structure,
system, service or process.

4. Analyzing the economic impact of

engineering improvements or modifications
on an existing product, system, or process.

5. Deciding on when to replace the existing

equipment.

6. Deciding whether to lease or purchase

equipment to improve existing operation.
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Price - the amount of money or its equivalent which can be given in
exchange for a product or service.

Market – a place where sellers and buyers and services come together to

Basic make transactions.

Concepts Local Market – limited locality

Domestic Market – whole country

World Market - international

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Consumer Goods and Services - products or services that are directly used by
people to satisfy their wants.

Producer Goods and Services - used to produce consumer goods and

services or other producer goods.

Basic Necessities – products or services required to support human life and activities,
Concepts 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 and after necessities are obtained.
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Demand - the quantity of a certain commodity that is bought at a certain
price at a given place and time.

The Law of Demand - fundamental principle of economics that at a higher

Basic price consumers will demand a lower quantity of goods.

Elastic Demand – occurs when a decrease in selling price result in a
Concepts greater than proportionate increase in sales.
Inelastic Demand – occurs when a decrease in the selling price
produces a less than proportionate increase in sales

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Unitary elasticity of demand - occurs when the mathematical product of
volume and price is constant.

Luxuries

Basic Demand

Demand
Concepts
Necessities

Price Price
General Price-Demand Relationship Price-Demand Relationship for Necessities
And Luxuries
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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 – opposite of perfect competition. A perfect monopoly exists

Basic when a unique product or service is available from a single vendor and

Concepts
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.
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Supply - quantity of certain commodity
that is offered for sale at a certain price
at a given place and time.

Basic Law of Supply– All other factors being

Supply
equal, as the price of a good or service

Concepts increases, the quantity of goods or

services that suppliers offer will
increase, and vice versa
Price
General Price-Supply Relationship

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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 demand being equal. Generally, low supply and
high demand increase price and vice versa.

Demand Supply
Basic

Units
Concepts
Price
Price-Supply-Demand Relationship
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Law of Diminishing Returns
- When the use of one of the
factors of production is limited,
either in increasing cost or by

Basic
absolute quantity, a point will
be reached beyond which an

Concepts
increase in the variable
factors will result in a less
than proportionate increase in
output.

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Interest and Money-Time Relationships

Interest – the amount of money paid for the use of borrowed capital or the income produced
by money which has been loaned.

Simple Interest – 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 tie of the loan is measured in days.

𝐈 = 𝐏𝐧𝐢
𝐅 = 𝐏 + 𝐈 = 𝐏 + 𝐏𝐧𝐢 = 𝐏(𝟏 + 𝐧𝐢)

Where I – interest, P – principal or present worth, n – number of interest periods, I – rate of

interest per interest period, F – accumulated amount or future worth Restricted Distribution: Copyrighted Material
Interest and Money-Time Relationships

Ordinary Simple Interest - computed on the basis of 12 months of 30 days

each or 360 days a year

1 interest period = 360 days

Exact Simple Interest – based on the number of days on a year, 365 days
for an ordinary year and 366 days for a leap year.

1 interest period = 365 days or 366 days

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Example Determine the ordinary simple interest on P700 for 8 months and 15 days
if the rate of interest is 15%.

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Example Determine the ordinary simple interest on P700 for 8 months and 15 days
if the rate of interest is 15%.

Solution:

Number of days = 8(30) + 15 = 255 days

255
I = Pni = 700 0.15 = 𝑃74.38
360

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Example Determine the exact simple interest on P500 for the period from January
10 to October 28, 1996 at 16% interest.

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Example Determine the exact simple interest on P500 for the period from January
10 to October 28, 1996 at 16% interest.

Solution:

Number of days = 292 days

Jan – 21 (excluding Jan. 10), Feb – 29, March – 31, Apr – 30, May – 31,
Jun – 30, Jul – 31, Aug – 31, Sep – 30, Oct – 28 (including Oct. 28)

292
I = Pni = 500 0.16 = 𝑃63.83
366

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Example 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?

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Example 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?

Solution:

14
F = P 1 + ni = 10000 1 + 0.12 = 𝑃11,400
12

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Seatwork 1
1. Determine the ordinary simple interest on P20,000 for 9
months and 10 days if the rate of interest is 12%.
2. Determine the ordinary and exact simple interests on
P100,000 for the period January 15 to June 20, 2012 if
interest is 15%.
3. If P4,000 is borrowed for 75 days at 16% interest rate per
annum, how much will be due at the end of 75 days?
4. How long will it take for a deposit of P1,500 to earn P186
1
if invested at a simple interest rate of 7 %?
3
5. The tag price of a certain commodity is for 100 days. If
paid in 31 days, there is a 3% discount. What is the simple
interest rate?

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Seatwork 1
Solution #1 Determine the ordinary simple interest on P20,000 for 9 months and 10
days if the rate of interest is 12%.

Given:
P = 20,000
i = 12% = 0.12
n = 9 30 + 10 = 280 days

Solution:
280
I = Pni = 20,000 0.12 = 𝑃1,866.67
360

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Seatwork 1
Solution #2 Determine the ordinary and exact simple interests on P100,000 for
the period January 15 to June 20, 2012 if interest is 15%.

Given: Note: 2012 is a leap year

P = 100,000
i = 15% = 0.15
n: Jan − 15, Feb − 30, Mar − 30, Apr − 30, May − 30, Jun − 20 = 155 days

Solution (for Ordinary Simple Interest):

155
I = Pni = 100,000 0.15 = 𝑃6,458.33
360

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Seatwork 1
Solution #2 Determine the ordinary and exact simple interests on P100,000 for
the period January 15 to June 20, 2012 if interest is 15%.

Given: Note: 2012 is a leap year

P = 100,000
i = 15% = 0.15
n: Jan − 16, Feb − 29, Mar − 31, Apr − 30, May − 31, Jun − 20 = 157 days

Solution (for Exact Simple Interest):

157
I = Pni = 100,000 0.15 = 𝑃6,434.43
366

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Seatwork 1
Solution #3 If P4,000 is borrowed for 75 days at 16% interest rate per annum,
how much will be due at the end of 75 days?

Given:
P = 4,000
i = 16% = 0.16
n = 75days

Solution:

75
F = P(1 + ni) = 4,000 1+ 0.16 = 𝑃4133.33
360

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Seatwork 1
Solution #4 How long will it take for a deposit of P1,500 to earn P186 if invested
1
at a simple interest rate of 7 %?
3

Given: Solution:
P = 1,500 I = Pni
1 I 186
i = 7 % = 0.073ത n= = ഥ)
= 1.69 years
3 Pi 1,500 (0.073
I = 186
n
= 1.69
360
n = 1.69 360 = 608.4 days

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Seatwork 1
Solution #5 The tag price of a certain commodity is for 100 days. If paid in 31
days, there is a 3% discount. What is the simple interest rate?

Given: Solution:
d = 3% F = P 1 + ni
69
n = 100 − 31 = 69 days F = 0.97F 1 + i
360

P = 0.97F i = 0.1614
i = 0.1614 100% = 16.14%

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