CHAPTER 1

THE ECONOMIC ENVIRONMENT

ENGINNERING ECONOMY- uses mathematical formulas to account for the time value
of money and to balance current and future revenues and costs. It is the analysis
and evaluation of the factors that will affect the economic success of engineering
projects.

ECONOMICS- is a social science concerned with mans problem of issuing scarce

resources to satisfy unlimited wants.
It is the science that deals with the production , allocation and used of goods
and services.
Two types:
1. MACROECONOMICS- the study of the entire system of economics.
(from Greek prefix "makros-" meaning "large" + "economics")
2. MICROECONOMICS- study how the system affect one business or parts of the
economic system.
NECESSITIES VS. LUXURIES
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
prices vary considerably.
LUXURIES Products or services that are desired by humans and will be purchased if
money is available after the required necessities have been obtained.
GOODS AND SERVICES
GOODS anything that anyone wants or needs
SERVCES Performance of any duties or work for another, helpful of professional
activity.

DIFFERENT KINDS OF GOODS

1. CONSUMER GOODS Those such as food and clothing that satisfy human
wants or needs.
2. PRODUCER GOODS Those such as raw materials and tools, used to make
consumer goods.

3. CAPITAL GOODS Machinery used in the production of commodities or

producer goods. Include educational, health, communication, transportations
and social services.
LAWOF SUPPLY AND DEMAND

The Law of Supply

States that at higher prices, producers are willing to offer more products for
sale than at lower prices
States that the supply increases as prices increase and decreases as prices
decrease
States that those already in business will try to increase productions as a way
of increasing profits.
The law of Demand

States that people will buy more of a product at a lower price than at a higher
price, if nothing changes
States that at a lower price, more people can afford to buy more goods and
more of an item more frequently, than they can at a higher price
States that at lower prices, people tend to buy some goods as a substitute for
others more expensive

TYPES OF DEMAND
1. ELASTIC DEMAND exists when there is a greater change in quantity
demanded as a response to a change in price.
2. INELASTIC DEMAND exists when there is a lesser change in quantity
demanded in response to a change in price.
UNITARY- exist when there is an equal change in price and in quantity demanded
(increase or decrease)
FACTORS THAT INFLUENCE DEMAND
1. INCOME when income increases people are able to buy more.
2. POPULATION As the population grows, demand for goods and services
increases.
3. TASTE AND PREFERENCE Assuming prices are constant , people go more for
the goods they prefer as shaped by their tastes and biases.
4. PRICE EXPECTATION When people anticipate price increase, demand for its
product increases
5. PRICE OF RELATED GOODS When products price increases, people shift to
its substitutes, which known as goods.

FACTORS THAT INFLUENCE SUPPLY

1. PRICE OF GOODS2. COST OF PRODUCTON3. AVAILABILITY OF RESOURCES4. NUMBER OF PRODUCERS AND SELLERS5. TECHNOLOGICAL ADVANCEMENT
6. TAXES
7. SUBSIDIES
MARKET STRUCTURES
MARKET- The place where the vendors and buyers meet to transact.
COMPETITION, MONOPOLY AND OLIGOPOLY
PERFECT COMPETITION Occurs n 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. Single person or enterprise as a
supplier of particular commodity
from Greek monos (alone or single) + polein (to sell))
monopsony which relates to a single entity's control of a market to purchase
a good or service
OLIGOPOLY exist 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.

CHAPTER 2
INTEREST the return on capital or cost of using capital. It is 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 period.

I =Pni
F=P+ I =P+ Pni

F=P ( 1+ )
Where:

I = Interest
P = principal or present worth
N = number of interest period
I = rate of interest per interest period
F = accumulated amount or future worth

A. ORDINARY SIMPLE INTEREST

Under ordinary simple interest, it is assumed that each month contains
30 days and consequently, each year has 360 days
Example:
A loan of 50,000 is made for a period of 13 months from april 1 to april
30 of the following year,a t a simple interest rate of 20%. What future
amount is due at the end of the loan period?
Ans. 60, 833.33
Ex.2
What is the principal amount if the amount of interest at the end of 2
year is 450 for a simple interest rate of 6% per annum?
Ans. 3000

B. EXACT SIMPLE INTEREST

Under exact simple interest, the exact days per month is used. There
are 365 days per year on ordinary year and 366 days every fourth year
called leap year
Ex.
Determine the exact simple interest of 25000 for the period from dec
27, 2001 to march 23, 2003, if the rate of interest is 10%?
Ans. 3095.89
CASH- FLOW DIAGRAMS depict the timing and amount of expenses (negative,
downward) and revenues ( positive, upward0 for engineering projects.
Receipt ( positive cash flow or cash inflow)
Disbursement ( negative cash flow or outflow)
Ex.
A loan of 10000 at simple interest of 10% will become 15000 after 5
years.
COMPOUND INTEREST
The interest for an interest period is calculated on the principal plus total
amount of interest accumulated in previous period. Which compound interest
means the interest on top of interest.
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 ( 1+i )n
P,i ,n
F /
F=P
The symbol F/P, i%,n is read as F given P at i% in n interest periods
Ex. What rate of interest compounded annually must be received if an
investment of 5400 made now will result in a receipt of 7200 in 5 years?
Ans. 5.92%
Ex. What amount will be accumulated by 4100 in 10 years at 6%
compounded annually
Ans. 7342.48
RATES OF INTEREST

A. NOMINAL RATE OF INTEREST specifies the rate of interest and a number

of interest period in one year.
i= r/m
Where:

i= rate of interest / interest period

R = nominal interest period
M = number of compounding periods

B. EFFECTIVE RATE OF INTEREST is the actual or exact rate of interest on

the principal during one year
E = F -1
E=
Where:

(1+i)m 1

E = effective rate
F = future worth rate
i = rate of interest/ interest period
m = number of compounding periods

ex. What effective annual interest rate corresponds to the following

situations:
a. Nominal interest rate of 10% compounded semi-annually ans. 10.25%
b. Nominal interest rate of 6% compounded monthly
ans. 6.17%
c. Nominal interest rate of 8% compounded quarterly ans. 8.24@
Ex. If 1000 becomes 5734 after 15 years, when invested at an
unknown rate of interest compounded semi-annually, determine the unknown
nominal rate and corresponding effective rate.
Ans. I=12.36% r=12%
EQUATION OF VALUE obtained by setting the sum of values on a certain
comparison or local date of one set of obligations equal to the sum of the values on
the same date of another set of obligations
Ex. Jay wishes his son, jayson to receive 1000000 twenty years from now.
What amount should he invest now, if it will earn interest of 12% compounded
annually during the first 5 years and 10% compounded monthly for the remaining
years.
Ans. P5 = 224 521.34; P0 = 127 399.44
Ex. Find the present worth of a future payment of 30000 to be made in 10
years with an interest rate of 10% compounded annually. What will be the amount if
it will be paid on the 15th year?
Ans. 115 662.99; 483 153.01
CONTINOUS COMPOUNDING INTEREST

it

I =P e
Where:

I = interest
i = rate of interest/ interest period
t = number of compounding periods

ex. Philip invested 100 on bank. The bank offers 5% interest compounded
continuously in a savings account. Determine (a) how long will it require for him to
earn 5 (b) the equivalent simple interest rate for 1 year bank?
Ans. .9758 year; 5.127%
DISCRETE PAYMENTS
The solution in discrete payments or number of transactions occurring at
different periods is taking each transaction to the base year and equating each
value.
Ex. Acosta holdings borrowed 9000 from smith corporation on January 1,
1998 and 12000 on January 1 2000. Acosta holdings made a partial payment of
7000 on January 1, 2001. It was agreed that the balance of the loan would be
amortized by two payments. One on January 1, 2002 and one January 1, 2003.the
second being 50% larger than the first. If the interest rate is 12% what is the
amount of each payment?
Ans. 9137.18; 13 705.77
BANKERS DISCOUNT (COMPOUNDING INTEREST)
Certain banks lend money in such a way they deduct the interest on the
money. They actually dont lend the money you asked for. This type of computing
for money is called bankers discount. The money received by the borrower after the
discount has been deducted is called proceeds.
D=FP
D = Fdn
Computing for the relationship between the interest rate and the discount
rate
For simple rate

i
=d
1+

For compounding interest

n

d=

For the discount rate

1(1+)
n

(1nd) 1
i=
n
Ex. Ms. Glydel marquez borrowed money from a bank. She received
from the bank 1342 and promised tor epay 1500 at the end of 9 months. Determine
the (a) simple interest (b) discount rate (compound rate of discount)