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ENGINEERING
DEFINITIONS, It is the profession in which knowledge of the
mathematical and natural sciences gained by study,
TERMINOLOGIES, AND
experience and practice is applied with judgement to
develop ways to utilize economically the material
and forces of nature for the benefit of mankind.
CONCEPTS
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economics
It is the science that deals with the production and
consumption of goods and services and the ✗ ECONOMICS
distribution and rendering of these for human
welfare. ✗ VS
✗ ECONOMY
A high level of employment, price stability, efficiency,
an equitable distribution of income, and growth are
the economic goals.
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BASIC
ECONOMICS ECONOMY
COMPARISON
Economics is the science and art of When a country or a geographical
decision making, regarding the use of region is defined in the context of its
MEANING
scarce resources, under the conditions of economic activities, it is known as
scarcity, to attain maximum satisfaction. economy or economic system.
WHAT IS IT? Theory and Principle Practical Application of Economics Engineering + economics
How human beings make decisions How are resources allocated among
DETERMINES?
when there is scarcity of resources? different members of society?
The way in which economic agents
The way in which country’s economic
FOCUSES ON? behave and interact and the way in
affairs are organized and conducted.
which economies work.
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ENGINEERING ECONOMICS alternative
It deals with the methods that enable one to take It is a stand-alone solution for a given situation.
economic decisions towards minimizing costs and/or
maximizing benefits to business organizations.
In the simplest of terms, it is a collection of techniques
that simplify comparisons of alternatives on an economic
basis.
It is not a method or process for determining what the
alternatives are. On the contrary, it begins only after the
alternatives have been identified.
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Cash flow Alternative selection
The estimated inflows (revenues) and outflows (costs) of Every situation has at least two alternatives.
money.
In addition to the one or more formulated alternatives,
there is always the alternative of inaction, called the do-
nothing (DN) alternative.
If this was selected out of all the alternatives, it shall be
the most favorable economic outcome at the time of
evaluation.
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Evaluation criteria Tangible factors
It is the use of criteria to choose between alternatives. In economic analysis, financial units (currency) are
generally used as the tangible basis for evaluation and
considered as an economic factor.
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Intangible factors Time value of money
When alternatives under consideration are hard to The change in the amount of money over a given time
distinguish economically or difficult to quantify, intangible period is called the time value of money.
factors may tilt the decision in the direction of one of the
alternatives.
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PRINCIPLE 1: Develop the Alternatives
Carefully identify and define the problem then the choice
PRINICIPLES OF ENGINEERING
(decision) is among alternatives.
Engineers and managers should place a high priority on
ECONOMICS this responsibility
Creativity and innovation are essential to the process.
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PRINCIPLE 2: Focus on the Differences PRINCIPLE 3: Use a Consistent Viewpoint
Only the differences in the future outcomes of the The prospective outcomes of the alternatives, economic
alternatives are important. and other should be consistently developed from a
defined viewpoint.
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PRINCIPLE 4: Use a Common Unit of Measure PRINCIPLE 5: Consider All Relevant Criteria
Using a common unit of measurement to enumerate as Selection of a preferred alternative (decision making)
many of the prospective outcomes as possible will requires the use of a criterion (or several criteria).
simplify the analysis of the alternatives.
In engineering economic analysis, the primary criterion
For measuring the economic consequences, a monetary relates to the long-term financial interest.
unit (e.g., peso) is the common measure.
Decision making based on several criteria.
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PRINCIPLE 6: Make Risk and Uncertainty Explicit PRINCIPLE 7: Revisit Your Decisions
Risk and uncertainty are inherent in estimating the future A good decision-making process can result in a decision
outcomes of the alternatives and should be recognized, that has an undesirable outcome.
identify, define, allocate and mitigate.
Other decisions, even though relatively successful, will
have results significantly different from the initial
estimates of the consequences.
The initial projected outcomes of the selected
alternatives should be subsequently compared with
actual result achieved.
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PROBLEM 1
While studying for the Engineering Economics final exam, you and
your two friends find yourselves craving for a fresh pizza. You can’t
spare the time to pick up the pizza and must have it delivered.
“Pizza Hub” offers a 1” thick (including toppings), 20” square pizza
with your choice of two toppings for ₱750.00 plus 5% sales tax
and a ₱75.00 delivery charge (no sales tax on delivery charge).
“Crusty Pie” offers the round, deep-dish Sasquatch which is 20 a. What is the problem in this situation? Please
inches in diameter. It is 1-3/4” thick, which includes two toppings,
and costs ₱900.00 plus 5% sales tax and free delivery. state it in a lucid manner.
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b. Systematically apply the seven principles of Principle 1:
engineering economy to the problem you have develop the alternatives
defined in part (a).
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Principle 2: Principle 3:
Focus on the differences Use a consistent Viewpoint
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Principle 4: Principle 5:
Use a common unit of measure Consider all relevant criteria
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Principle 6: Principle 7:
Make uncertainty explicit Revisit your decision
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SOLUTION:
c. Assuming that your common unit of measure is ₱ (i.e., cost), what is
the better value for getting a pizza based on the criterion of minimizing
cost per unit of volume?
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FLOW IN AN
ECONOMY
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LAW OF SUPPLY Law of demand
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Disequilibrium
(excess of supply –
equilibrium
Surplus)
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Disequilibrium
(excess of demand - COST CONCEPT FOR DECISION
Shortage) MAKING
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COST IMPORTANCE OF COST
The word cost (or expense) has meanings that vary in Used to describe the process by which the present and
usage, usually refers to the expenditure in some particular future cost consequences of engineering designs are
situation. forecast.
Provide information used in setting a selling price for
quoting, bidding, or evaluating contract.
Determine whether a proposed product can be made and
distributed at a profit.
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COST ESTIMATING APPROACHES FIXED COSTS
Top-Down Approach Bottom-Up Approach are those unaffected by changes in activity level over a
feasible range of operations for the capacity or capability
Uses historical data from More detailed cost- available.
similar projects. estimating method.
Best use is early in Works best when detail Example: Insurance and taxes on facilities, general
estimating process. concerning desired output management and administrative salaries, license fees, and
defined and clarified. interest costs on borrowed capital.
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Variable costs TOTAL COSTS
are those associated with an operation that vary in total The sum of the fixed costs and variable costs.
with the quantity of output or other measures of activity
level.
Example: Costs of material and labor used in a product or
service, because they vary in total with the number of output
units, even though costs per unit remain the same (i.e. fixed
cost).
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INCREMENTAL COSTS
are the additional cost that results from increasing the
output of a system by one (or more) units.
PROBLEM 2
A group of engineering study team is making analysis in a decision
Decremental costs to produce a new product in two alternative site. Details are as
If there is a decrease in cost resulting from decrease in follows:
output.
Differential costs
the change in costs due to change in the level of activity
or pattern or technology or process or method of
production.
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Recurring costs Nonrecurring COSTS
are repetitive and occur when a firm produces similar are those that are not repetitive, even though the total
goods and services on a continuing basis. expenditure may be cumulative over a relatively short
period of time.
Example: Variable costs because they repeat with each unit
of output, and fixed cost that is paid on a repeatable basis Example: Purchase cost for real estate upon which a plant
such as office space rentals. will be built, and the construction costs of the plant itself.
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Direct costs Indirect costs
can be reasonably measured and allocated to a specific are difficult to attribute or allocate to a specific output or
output or work activity. work activity.
Example: The labor and material costs directly associated Example: Costs of common tools, general supplies, and
with a product, service or construction activity such as the equipment maintenance.
materials needed to make a pair of scissors.
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Overhead costs Standard costs
consist of plant operating costs that are not direct labor or are planned costs per unit of output that are established
direct material costs. Indirect costs and overhead costs are in advance of actual production or service delivery.
usually used interchangeably.
Example: electricity, general repairs, property taxes, and
supervision.
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Cash costs Book costs
are costs that involves payment in cash and results in or noncash costs are payments that do not involve cash
cash flow. transaction which represent the recovery of past
expenditures over a fixed period of time.
Example: Future expenses incurred for alternatives being
analyzed, and costs that are cash flows or potential cash Example: Depreciation (not a cash flow) is the most common;
flows to be considered. depreciation is what is charged for the use of assets, such as
plant and equipment.
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Marginal costs Sunk costs
are the costs of producing an additional unit of the are irrecoverable costs and is caused by complete
product. abandonment.
Example: The cost of building an entirely new factory in order Example: Depreciated fixed assets, and development cost
to produce more goods. already incurred.
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Opportunity costs
refer to the value of sacrifice made, or benefit of
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opportunity foregone in accepting an alternative course of
action.
Example: (i) The opportunity cost of funds invested in a
business is the interest that could have been earned by Any questions?
investing the funds employed in the business somewhere
else as in the bank as a fixed deposit.
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