Chapter 1

BASIC PRINCIPLES OF
ECONOMICS
CpE 311
ENGINEERING ECONOMY
Our Lady of the Pillar College Cauayan
College of Engineering and Technology

Economics
is one of the social sciences which

consist of that body of knowledge

dealing with people and their assets or
resources.
It is also defined as the sum total of
knowledge which treats of the creation
and utilization of goods and services
for the satisfaction of human wants.

Engineering
Is the profession in which a knowledge of the

mathematical and natural sciences gained by

study, experience, and practice is applied with
judgment to develop ways to utilize,
economically, the materials and forces of
nature for the benefit of mankind.(ABET)

Engineering Economy
is defined as that branch of

economics which involves the

application of definite laws of
economics, theories of investments
and business practices to engineering
problems involving cost.
Involves the systematic evaluation of
the economic merits of proposed
solutions to engineering problems.

Important applications of
Engineering Economy
1. Seeking of new objectives for the
2.
3.
4.
5.

applications of engineering.
Discovery of factors limiting the success
of a venture or enterprise.
Analysis of possible investment of
capital
Comparison of alternatives as a basis for
decision.
Determination of bases for decision.

Engineering Economy
Technique
The complete analysis of a proposed
project involves 3 basic steps
according to Bullinger:
1. The economy analysis
2. The financial analysis
3. The intangible analysis

The Economy Analysis

Considers all factor affecting the

economy of the project which can be

reduced to specific monetary values. It
determines the initial cost of the project,
the cost for operation and maintenance,
the needed working capital, the probable
income the project will generate when
operational, the rate of return on the
investment, and all other cost factors.

The Financial Analysis

Its primary purpose is the determination

of the methods and sources of financing

the project, either through equity capital
or barrowed capital, or a combination of
both. It tries to discover the best
method of financing the project to the
extent of the amount obtained in the
economy analysis.

The Intangible
Analysis
Determine all aspect of the project

which cannot be reduced to

monetary values and considers the
uncertainty and the risk inherent in
the project. Its scope includes the so
called judgment factor whose
analysis depends upon the
judgment of responsible persons
involved in the project.

Basic Terms and

Principles
a. Tangible and Intangible Factors
Tangible Factors are those which can be
expressed in terms of monetary values.
Intangible Factors are those which are difficult, or
impossible to express definitely in terms of
monetary values. Also called Irreducible factors.
b. Competition
Perfect Competition occurs when a certain
product is offered for sale by many vendors or
suppliers, and there is no restriction against other
vendors from entering the market. Buyers are free
to buy from any vendor, and the vendors likewise,
are free to sell to anyone.

Basic Terms and

Principles
c. Monopoly
Perfect Monopoly is the opposite of
competition. It occurs when a unique product or
service is available only from a single supplier
and entry of all possible suppliers is prevented.
Under conditions of perfect monopoly, the
single vendor can control the supply and the
price of the product or service.
d. Oligopoly
Occurs when there are few suppliers and any
actions taken by anyone of them will definitely
affect the course of action of the others.

Basic Terms and

Principles
e. Price and Production
The price of good commodity is defined to

be the amount of money or its equivalent

which is given in exchange for it. In a
capitalistic system, industry is based on
profit, and profit is in turn based on price.
Price therefore regulates production. If
prices go up, production will increase. If
prices decrease, production will also
decrease or cease.

Basic Terms and

Principles
f. Local and National Market
Market is defined to be the place where
sellers and buyers come together.
Local Market a limited locality where
certain goods such as those which are
perishable are sold.
National Market certain goods sold all
over the country.
World Market - goods that are exported to
other countries.

Basic Terms and

Principles
g. Consumer and Producer Goods

Consumer Goods those that are

consumed or used directly by people, or

are things and services which serves to
satisfy human needs.
Producers Goods are those which
produce goods and services for human
consumptions. These are instrumental
in producing in producing something or
furnishing service for people.

Basic Terms and

Principles
h. Demand
Is a quantity of a certain commodity
that is bought at a certain price at a
given place and time. It should not be
confused with the quantity of the
commodity which a person desires to
purchase.
i. Law of Demand
The demand of a commodity varies
inversely as the price of the
commodity, though not

Basic Terms and

Principles
Elasticity of Demand
Elastic Demand occurs when a decrease in selling price
will caused a greater than proportionate increase in the
volume of sales. These goods are considered luxuries.
Inelastic Demand occurs when a decrease in selling
price will cause a less than proportionate increase in
sales. Goods which are classified as necessities usually
have inelastic demand, because even a big decrease in
selling price will not cause a big increase in the volume
of sales.
Unitary Elasticity of Demand occurs when the
mathematical price of product and volume of sales
remains constant regardless of any change in price
j.

Basic Terms and

Principles
k. Utility and Demand
Utility is defined to be the capacity of a

commodity to satisfy human want. If the

utility of a certain good to a certain
individual is great, his demand on that
good will be great.
l. Law of Diminishing Utility
An increase in the quantity of any good
consumed or acquired by an individual will
decreased the amount of satisfaction
derived from the good.

Basic Terms and

Principles
m. Marginal Utility
The marginal Utility of a commodity is the

utility of the last unit of the same

commodity which is consumed or acquired.
n. Supply
Supply is the quantity of a certain
commodity that is offered for sale at a
certain price.
o. Law of Supply
The supply of commodity varies directly as
the price of commodity, though not
proportionately.

Basic Terms and

Principles
p. Law of Supply and Demand

Stated as; when free competition exist,

the price of a product will be that value

where supply is equal to the demand.
q. Law of Diminishing Returns
The law maybe stated thus: 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.

Basic Terms and

Principles
r. Marginal Revenue and Marginal Cost
Marginal Revenue is that amount received
from the sale of an additional unit of a
product.
Marginal Cost is the additional cost of
producing one more unit.
s. Physical and Economic Efficiency
In the economic world, man always strives to
gain more than he invests, whether it be
materials, money or energy.

Basic Terms and

Principles
t. Compromise Between Perfection and

Economy
Perfection is a human ideal worth striving
for. However, in the practical world,
compromise from perfection is usually the
rule. Complete quality control of all the
units produced by a factory is to be
desired, but it will definitely increase the
cost of manufacturing, such that the goods
are priced out the market. It is desired that
a machine function properly as a physical
unit, but it must also function properly as