MODULE 1 - INTRODUCTION ENGINEERING ECONOMY SCIENCE the foundation upon which engineering builds towards the advancement of mankind.

. ENGINEERING the profession in which a knowledge of mathematical and natural sciences gained by study, experience and practice is applied with judgment to develop ways to utiliz e economically the materials and forces for the benefit of mankind. ECONOMICS is the sum total of knowledge which treats of the creation and utilization of goods and services for the satisfaction of human wants. (from the Greek words oikos = household, nomia = laws) is one of the social sciences which consists of that body of knowledge dealing with people and their assets or resources. interaction between people and wealth; exchange of transaction. MACROECONOMICS modern economic analysis that is concerned with data in the aggregate as opposed to individual form. it concerns itself with an overall view of economic life, considering the total siz e, shape, and functioning of economic experience rather than the workings of individual parts. MICROECONOMICS modern economic analysis concerned with data in individual form as opposed to the aggregate form. It is concerned with the study of the individual firm rather than t he total population and the individual commodity rather than the total output. MANAGERIAL ECONOMICS

is that branch of economics which studies the application of the theories, tools, and findings of economics analysis to managerial decision making in all organizations which allocate limited or scarce resources. ENGINEERING ECONOMY is the branch of economics that involves the application of definite laws of economics, theories of investment and business practices to engineering problems involving cost. it is the study of economic problems with the concept of obtaining the maximu m benefit at the least cost. it involves the study of cost features and other financial data and their applications in the field of engineering as the basis for decision. process of determining whether an engineering project is to be undertaken or modified with the objective of obtaining the best utilization of capital resources taken into account some pertinent facts.

Reasons for Studying Engineering Economics 1. It will readily benefit mankind in general due to the more efficient use of wealth. 2. It will realize that engineering does not merely concern itself with technical asp ects, but will ultimately lead to economic considerations. Decision Making Process 1. Recognition of the problem. 2. Definition of goal or objective. 3. Identification of feasible alternative. 4. Selection of criterion or criteria for judging which alternative is best. 5. Predicting for the outcomes for each alternatives. 6. Choice of the best alternative to achieve objectives. Important Applications of Engineering Economy 1. Seeking of new objectives for the applications of engineering. 2. Discovery of factors limiting the success of a venture or enterprise. 3. Analysis of possible investment of capital. 4. Comparison of alternatives as a basis for decision. 5. Determination of basis for decision. Engineering Economy Technique 1. The economy analysis 2. The financial analysis 3. The intangible analysis Engineering Process (the total environment) PHYSICAL

ECONOMIC

Engg Proposal producers-consumers Eff = output/input goods-services Eff = worth/cost Want/Satisfaction

ECONOMIC CONCEPT (interaction between people and wealth)

PRODUCER

Goods-services

money

Goods-services

money

CONSUMER Consumer objective is get satisfaction of their properties or needs. Producer objective is to maximize profit in his business. Basic Terms and Principles of Economics 1. The success of engineering and business project is more commonly measured in terms of financial efficiency that in any other way. Rate of Return measure of the effectiveness of an investment of a capital. ROR = net profit/capital investment >= 15% 2. There are two types of life, namely: a. Physical life the time that it takes for the machine to function normally. b. Economic life

 a function that has something to do with revenue. 3. Value designates the worth that a person attaches to an object or service. 4. Utility is the power to satisfy human wants, 5. Two classes of Goods: a. Consumer Goods products and services that directly satisfy the human wants or needs. b. Producer Goods also satisfy human wants but do so intently as a part of production process (example: bulldozers, ships, buildings, buses, etc.). 6. Two types of Goods: a. Luxuries necessities vary from person to person. b. Necessities products that are required to support human life/needs. 7. Two types of Factors that affect Economic Studies: a. Tangible Factors are those which can be expressed in terms of monetary values. b. Intangible Factors are those which are difficult to express definitely in terms of monetary values that cannot be measured.

8. Market is the place where the vendors or the 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. 9. Types of Marketing Strategies: a. Perfect Competition many sellers, many buyers. b. Monopoly one seller, many buyers. c. Monopsony - many sellers, one buyer. d. Duopsony - many sellers, two buyers. e. Oligopoly few sellers, many buyers. f. Oligopsony many sellers, few buyers. 10. Demand and Supply: Demand quantity of a certain commodity that is brought at a certain price and time. Demand depends on price, technology, taste and preference and resources. Law of Demand states that the demand for a commodity varies inversely as

the price of commodity. Supply is the quantity of a certain commodity that is offered for sale at a certain price at a given place and time. Supply depends on cost, technology and price. Law of Supply states that the supply of a commodity varies directly as the price of the commodity. Law of Demand and Supply under certain conditions of perfect competition, the price of a product will be such that the supply and demand are equal.

LAW OF DEMAND

LAW OF SUPPLY

Price

Price

Volume (Demand)

Volume (Supply)

LAW OF SUPPLY & DEMAND

D S Point E point where price is determined.

neither surplus nor shortage. Point N & O there is surplus of supply.

there is shortage of demand. Point P & R there is shortage of supply.

E there is surplus of demand.

P R

SELECTION IN PRESENT ECONOMY Present Economy means a condition wherein the worth of alternatives are evaluated in the basis of their present or immediate cost. Time- money relationship is not a factor. one important factor that must be kept in present economy studies is that the results of the various alternatives must substantially satisfactory. Design Methods Materials Site efficiency of workers Tools and equipment PRINCIPLES OF ENGINEERING ECONOMY 1. Develop the alternatives - The choice (decision ) is among alternatives. The alternatives need to be identified and then defined for subsequent analysis. 2. Focus on the differences - Only the differences in expected future outcomes among the alternatives are relevant to their comparison and should be considered in the decision. 3. Use a consistent viewpoint - The prospective outcomes of the alternatives, economic and other, should be consistent developed form a defined viewpoint (perspective). 4. Use a common unit of measure - Using a common unit of measure to enumerate as many of the prospective outcomes as possible will simplify the analysis and comparison of the alternatives. 5. Consider all relevant criteria - Selection of a preferred alternative (decision

making) requires the sue of criterion (or several criteria). The decision process should consider both the outcomes enumerated in the monetary unit and those Alternatives

expressed in some other unit of measurement or made explicit in a descriptive manner. 6. Make uncertainty explicit - Uncertainty is inherent in projecting (or estimating) the future outcomes of the alternatives and should be recognized in their analysis and comparison. 7. Revisit your decision - Improved decision making results from an adaptive process, to the extent practicable, the initial projected outcomes of the selected alternatives should be subsequently compared with actual results achieved. THE GENERAL RELATIONSHIP BETWEEN THE ENGINEERING ECONOMIC ANALYSIS PROCEDURE AND THE ENGINEERING DESIGN PROCESS Engineering Economic Analysis Procedure Engineering Design Process STEP

ACTIVITY 1. Problem recognition, definition and 1. Problem/ need definition evaluation. 2. Problem/ need formulation and evaluation. 2. Development of the feasible alternatives. 3. Synthesis of possible solutions

(alternatives). 3. Development of the outcomes and cash flow for each alternatives. 4. Selection of criterion (or criteria) 4. Analysis, optimization and evaluation

5. Analysis and comparison of the alternatives. 6. Selection of preferred alternative 5. Specification of preferred alternatives 7. Performance monitoring and 6. Communication post-evaluation of results. Sample problems: 1. Two types of filter are being considered for use in a diesel engine. Filter A requires a premium quality lubricating oilcosting P131.50 per liter. The filter and the oil will have to be changed after 1,000 hours of operation and 4 liters of new oil added after each 100 hours. This filter costs P150. Forty liters of oil fill the engine crankc ase. For filter B, a lower grade of oil costing P120.85 per liter may be used. This fil ter costs P175. In this case the filter would be changed each 1,000 hours, the oil completely changed after 500 hours and 4 liters of oil added after 250 hours of use. Which combination should be used?

2. A duplicating service will make electrostatic copies of documents up to 8 x 11 inches in size for 70 cents per copy for the first 10 and 40 cents per copy for all additional. It will also reproduce such documents by offset printing at a cost o f P3.00 for the master and 10 cents per copy with a minimum quantity of 30 bei ng required. a. assuming the each process gives satisfactory pieces, which will be more economical for 25 copies? b. At what quantity are the two processes equal in cost? 3. In manufacturing a certain machine part, it is necessary to make four holes in each part. Each hole will require 1 min. if drilled with the aid of a jig. The drill jig would cost P400 to construct and the drill press operator is paid P23.25 per hour. Overhead costs on the drill press are P12.00 per hour. The four holes can be made in 20 seconds on a punch press, but a die costing P650 will be required. It requires hour to set up the die on the press and the same period of time to tear it d own when the job is completed. Overhead charges for the punch press are P13.50 per hour. The press operator receives P23.00 per hour and the set-up man is paid P25.00 per hour. a. Determine the comparative cost for making 1,000 parts. b. Determine the number of parts to be made for equal cost. 4. On a certain automatic machine, 3 speeds are available for cutting head materials:

Speed A Speed B Speed C Output/hour 360 pcs 400 pcs 460 pcs Tool regrinding every: 12 hrs 10 hrs 8 hrs A set of tool costs P560 and can be ground 20 times. P60. Each regrinding costs

The time requires to regrind and change tool is 2 hrs. The machine operator is paid P22.75 per hour including toolchange time. The tool setter receives P15.00 per hour. Over head costs on the machine are P12.00 per hours including tool chan ge time. At which speed should the machine be operated? 5. A certain masonry dam requires 200,000 cu.m of gravel for its construction. The contractor found 2 possible sources for the gravel with the following data:

Source A Source B Ave. distance (pit-dam site) 3 km 1.2 km Gravel cost/cu.m at pit P10 Purchase price of pit P800,000 Road construction necessary P450,000 Overburden to be removed at P4.20/cu.m 90,000cu.m Hauling cost/cu.m/km P4.00 P4.00 Which source of gravel should the contractor consider?