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Terminologies to be defined:

• Economics

Economics is a social science concerned with the production, distribution and consumption of
goods and services. It studies how individuals, businesses, governments and nations make
choices on allocating resources to satisfy their wants and needs, and tries to determine how
these groups should organize and coordinate efforts to achieve maximum output.

Economic analysis often progresses through deductive processes, much like mathematical logic,
where the implications of specific human activities are considered in a "means-ends" framework.

Economics can generally be broken down into macroeconomics, which concentrates on the
behavior of the aggregate economy, and microeconomics, which focuses on individual
consumers.

• Engineering Economy (and who is the Father?)

Engineering economics, previously known as engineering economy, is a subset of economics


concerned with the use and "...application of economic principles" in the analysis of engineering
decisions. As a discipline, it is focused on the branch of economics known as microeconomics in
that it studies the behavior of individuals and firms in making decisions regarding the allocation
of limited resources.
Arthur M. Wellington founder of engineering economics, by profession a civil engineer, wrote a
book “the economic theory of location of railways” in 1887. His area of interest was role of
railways building in USA

• Engineering Economic Analysis (and who is the Founder?)


It focuses on economic and cost analysis of engineering projects, giving insights on modern
techniques and methods used on economic feasibility studies relating to design and
implementation of engineering projects. The basic purpose of this course is to provide a sound
understanding of concepts and principles of engineering economy and to develop proficiency
with methods for making rational decisions regarding problems likely to be encountered in
professional practice.
Arthur M. Wellington founder of engineering economics, by profession a civil engineer, wrote a
book “the economic theory of location of railways” in 1887. His area of interest was role of
railways building in USA

J C.L.Fish and O.B.Goldman both evaluated engineering structures from the perspective of
actuarial mathematics.

• Consumer Goods / Services


Consumer good, in economics, any tangible commodity produced and subsequently purchased to satisfy
the current wants and perceived needs of the buyer. Consumer goods are divided into three categories:
durable goods, nondurable goods, and services.

Consumer durable goods have a significant life span, often three years or more (although some
authorities classify goods with life spans of as little as one year as durable). As with capital goods
(tangible items such as buildings, machinery, and equipment produced and used in the production of
other goods and services), the consumption of a durable good is spread over its life span, which tends to
create demand for a series of maintenance services. The similarities in the consumption and
maintenance patterns of durable and capital goods sometimes obscure the dividing line between the
two. The longevity and the often higher cost of durable goods usually cause consumers to postpone
expenditures on them, which makes durables the most volatile (or cost-dependent) component of
consumption. Common examples of consumer durable goods are automobiles, furniture, household
appliances, and mobile homes.

• Producer Goods / Services


Producer goods, also called intermediate goods, in economics, goods manufactured and used
in further manufacturing, processing, or resale. Producer goods either become part of the final
product or lose their distinct identity in the manufacturing stream. The prices of producer goods
are not included in the summation of a country’s gross national product (GNP), because their
inclusion would involve double counting of costs and lead to an exaggerated estimate of GNP.
Only the price of final consumer goods is included in the GNP. The contribution of producer
goods to the GNP may be determined through the value-added method. This method
calculates the amount of value added to the final consumer good by each stage of the
production process. When the values added at all stages of production have been established,
they are summed to estimate the total value of the final product.
• Necessities
In economics a necessity good is a type of normal good. Like any other normal good, when
income rises, demand rises. But the increase for a necessity good is less than proportional to the
rise in income, so the proportion of expenditure on these goods falls as income rises.This
observation for food is known as Engel's law. The income elasticity of a necessity good is thus
between zero and one.
Necessity goods are goods that we cannot live without and will not likely cut back on even
when times are tough, for example food, power, water and gas.
The more necessary a good is, the lower the price elasticity of demand, as people will attempt
to buy it no matter the price.

• Luxuries

In economics, a luxury good (or upmarket good) is a good for which demand increases more
than proportionally as income rises, and is a contrast to a "necessity good", for which demand
increases proportionally less than income. Luxury goods are often synonymous with superior
goods and Veblen goods.

• Demand

Demand is an economic principle that describes a consumer's desire and willingness to pay a
price for a specific good or service. Holding all other factors constant, an increase in the price of
a good or service will decrease demand, and vice versa.
• Supply

Supply is a fundamental economic concept that describes the total amount of a specific good
or service that is available to consumers. Supply can relate to the amount available at a specific
price or the amount available across a range of prices if displayed on a graph.

• Elastic Demand

Price Elasticity Of Demand. If a small change in price is accompanied by a large change in


quantity demanded, the product is said to be elastic (or responsive to price changes).
Conversely, a product is inelastic if a large change in price is accompanied by a small amount
of change in quantity demanded.
• Inelastic Demand

Inelastic demand can be represented with a much steeper curve: large changes in price barely
affect the quantity demanded.

Inelastic is an economic term used to describe the situation in which the quantity demanded or
supplied of a good or service is unaffected when the price of that good or service changes.
• Unitary Elasticity

The demand for a good is unitary elastic if a change in the price of that good causes an equal
change in quantity demanded. In other words, the elasticity coefficient is equal to 1.
• Perfect Competition

Perfect competition is a market structure in which the following five criteria are met: 1) All firms
sell an identical product; 2) All firms are price takers - they cannot control the market price of
their product; 3) All firms have a relatively small market share; 4) Buyers have complete
information about the product being sold and the prices charged by each firm; and 5) The
industry is characterized by freedom of entry and exit. Perfect competition is sometimes referred
to as "pure competition".

• Monopoly
A market structure characterized by a single seller, selling a unique product in the market. In a
monopoly market, the seller faces no competition, as he is the sole seller of goods with no close
substitute.

In a monopoly market, factors like government license, ownership of resources, copyright and
patent and high starting cost make an entity a single seller of goods. All these factors restrict the
entry of other sellers in the market. Monopolies also possess some information that is not known
to other sellers.

Characteristics associated with a monopoly market make the single seller the market controller
as well as the price maker. He enjoys the power of setting the price for his goods.
• Oligopoly

Oligopoly is a market structure in which a small number of firms has the large majority of market
share. An oligopoly is similar to a monopoly, except that rather than one firm, two or more firms
dominate the market.
• Law of Supply and Demand

Supply and demand is perhaps one of the most fundamental concepts of economics and it is
the backbone of a market economy. Demand refers to how much (quantity) of a product or
service is desired by buyers. The quantity demanded is the amount of a product people are
willing to buy at a certain price; the relationship between price and quantity demanded is
known as the demand relationship. Supply represents how much the market can offer. The
quantity supplied refers to the amount of a certain good producers are willing to supply when
receiving a certain price. The correlation between price and how much of a good or service is
supplied to the market is known as the supply relationship. Price, therefore, is a reflection of
supply and demand.
• Law of Diminishing Returns

Diminishing returns, also called law of diminishing returns or principle of diminishing marginal
productivity, economic law stating that if one input in the production of a commodity is
increased while all other inputs are held fixed, a point will eventually be reached at which
additions of the input yield progressively smaller, or diminishing, increases in output.
• Valuation

Valuation is the process of determining the current worth of an asset or a company; there are
many techniques used to determine value. An analyst placing a value on a company looks at
the company's management, the composition of its capital structure, the prospect of future
earnings and market value of assets.

Enumerate and give a brief description for each:


• Functions and Uses of Engineering Economy

1.Develop the alternatives -The decision ( choice ) is among alternatives. The feasible
alternatives need to be identified and then defined for subsequent analysis.
2.Focus on the differences of the alternatives –Only the differences in the expected future
outcomes among the alternatives are relevant to their comparison and should be considered in the decision.
3.Use a consistent view point for all the alternatives
4.Use a common unit of measurement for comparison among alternatives
5.Consider all relevant criteria
6.Make uncertainty explicit
7.Review your decisionsPrinciples of Engineering Economy

• Engineering Economy Techniques

Future Worth Analysis


Benefit-Cost Ratio Analysis
Payback Period
Sensitivity and Breakeven Analysis

• Engineering Economic Analysis Procedures

Steps:

1. Problem recognition, definition, and evaluation.


2. Development of the feasible alternatives.

3. Development of the outcomes and cash flows for each alternative.

4. Selection of a criterion

5. Analysis and comparison of the alternatives.

6. Selection of the preferred alternatives.

7. Performance monitoring and post monitoring results.

• Intangible Values
• For example, goodwill, patents, trademarks and copyrights are intangible assets. None of
these assets can be physically touched, but they can still have value. The line item for
intangible assets is found on the balance sheet.
• Costs

Economic cost is the combination of gains and losses of any goods that have a value attached
to them by any one individual.

Fixed oost-A fixed cost is a cost that does not change with an increase or decrease in the
amount of goods or services produced or sold. Fixed costs are expenses that have to be paid by
a company, independent of any business activity.

Vairiable Cost-a cost that varies with the level of output.


• Overlapping Costs
• Payments

Some examples of payment methods include:

credit and debit card payments


direct debit payments
EFTPOS payments
online payments (eg Paypal)
cash
cheque
money order payments
gift cards and vouchers
bitcoin and digital currencies.

References
Library Receipt of reference borrowed

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