CE222-G

ENGINEERING ECONOMY

Presented by: Engr. Jordan

Ronquillo
BASIC ECONOMIC PRINCIPLES
 Economy – system of human activities
related to the production, distribution,
exchange, and consumption of goods and
services.

 Economics - one of the social sciences

which consists of body of knowledge
dealing with people and their assets or
resources.
 Engineering Economy – defined as the
branch of Economics which involves the
application of definite laws of
Economics, theories of investment and
business practices to engineering
problems involving costs

 Analysis and evaluation of the factors

that will affect the economic success of
any engineering project.
Why Study Engineering Economy?
 Engineers as defined by our profession
should sought improvement and innovate
for the well being of mankind which will
have an impact also on the economy.

 Practicing design engineers who wish to

venture on the business side of engineering
needs an adequate knowledge on this
subject. practical and economical aspects
must also be carefully considered.
 Important Application of Engineering
Economy
 Seeking of new objectives for the
application 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 basis for decision.

BASIC ECONOMIC PRINCIPLES
 Money – is a medium of exchange in the
sense that we will all agree to accept it in
making transaction.

 It has a purchasing power and serve as a

mean of trade for a specific goods or
services.
 When a certain products is offered for sale by
many vendors or suppliers and there is no
restriction against other vendors from entering
the market it is called “ Perfect Competition”

 Monopoly – the opposite of perfect

competition.

 Perfect Monopoly occurs when a unique

product or service is available only from
a single supplier and entry of all other
suppliers is prevented.
 Oligopoly – happens when there are few
suppliers and any action taken by anyone
of them will affect the other.

 Major examples of these are big oil

companies.
1. Chevron
2. Pilipinas Shell
3. Petron
 Price and Production
 The amount of money or its equivalent
which is given in exchange is called “price
of a good”.

 In a capitalistic system, industry is based on

profit, and profit is in turn based on price.

 Goods that are in great demand and are

scarce command a high price and therefore
will yield a high profit.
 Producers of those goods that are scarce
will naturally exert all available means to
increase their outputs.

 Goods that have little demand command

low price in relation to production cost
so manufacturers of those goods will
decrease their production.
 As a summary, Price regulates
production. If prices go up, production
will increase. If prices decrease,
production will also decrease.

Price Production
 Local and National Market
 Market is defined as place where sellers
and buyers come together.

 Local Market are certain perishable

goods that is limited within the locality.

 Goods that is sold over the country is

called National Market.
 Goods that are exported to other
countries are said to have a world
market.

Consumer and Producer Goods

 Consumer Goods – these are consumed

or used directly by people, or are things
and services which serve to satisfy
human needs. Ex. Clothes, shoes, food,
houses, medical and dental services.
 Producer Goods are those which produce
goods and services for human
consumption such as lathes, generators,
tools, ships, buses and airplanes.

 These are instrumental in producing

something or furnishing service for
people.
 Necessities and Luxuries
 Goods and services may be divided into
two types which is: necessities and
luxuries.

 Luxury Goods are good that demand

increase more than proportionality as
income rises. Serve as a status symbol.
 Necessity Goods are goods that we
cannot live without and will not likely
cut back on even times are tough. Ex.
Food, power, water and gas.

 Necessity and Luxury in summary

depends on the point of view of different
people and mostly dependent on the
level of individual income.
 Law of Supply and Demand
 Demand is the quantity of a certain
commodity that is bought at a certain
price at a given time and place.

 Law of Demand is the demand for a

commodity varies inversely as the price
of the commodity, though not
proportionately.
 Law of Demand
PRICE OF MILK Quantity Demanded

Php 100 20

Php 95 25

Php 90 30

Php 85 40

Php 80 55
 Law of Demand
Reason for changing demand slope:

1. Substitution Effect
2. Income Effect
3. Law of Diminishing Marginal Utility
 Law of Demand

1. Substitution effect

 Changes in price motivate consumers to

buy relatively cheaper substitute goods.
 Law of Demand

2. Income Effect

- Changes in price affects the purchasing

power of consumer’s income.
 Law of Demand

3. Law of Diminishing Marginal Utility

- As you continue to consume a given

product the satisfaction you will get
eventually will decrease with each unit
increase.
 Law of Demand
5 Shifters of the Demand curve

1. Taste/Preference
2. Number of Consumers
3. Price of Related Goods
4. Income
5. Expectations
 When the price of the commodity is low,
the demand is great, for then more
people will be able to afford the price of
the commodity.
The Law of Supply

 Is the quantity of a certain commodity

that is offered for sale at a certain price at
a given time and place.
 If the selling price for a product is high,
more producers will be willing to work
harder and risk more capital to reap
more profit.

 If the selling price for a product declines,

capitalists will not produce as much
because of smaller profit.
 Law of Supply
PRICE OF MILK Quantity Supplied

Php 100 50

Php 95 40

Php 90 35

Php 85 20

Php 80 10
5 Shifters of Supply

1. Price of Resources
2. Number of Producers
3. Technology
4. Taxes and Subsidies
5. Expectations
 Law of Supply and Demand may be
stated as:
When free competition exists, the price of a
product will be that value where supply is
equal to the demand.

 The price is only determined when the

demand is equal to the supply and sales
occurs. As shown in figure 1-02.
Figure 1-02
 Present Economy
 It involves the analysis of problems for
manufacturing a product or rendering a
service based on present or immediate
costs.

 The study and analysis of present

economy is employed when the
alternatives will provide same result and
the length of time involve is relatively
short.
 Present economy studies occur in the
following situations:
1. Selection of materials
2. Selection of method
3. Selection of design
4. Site selection
5. Comparison of proficiency of workers
6. Economy of tool and equipment
maintenance
7. Economy in the utilization of personnel
 Selection of Materials
 In manufacturing a product it usually
happens that two or more materials are
available and equally satisfactory.

 Choosing the most economical product

and at the same time give the best result
prevails.
 Selection of Method
 In a manufacturing operations by a
product may be made two or more
methods giving equivalent results.

 For example, In digging ditches or

irrigation canals, manual labor or a ditch
digging machine may be used and both
will give satisfactory results.
 There are other examples that may be
cited to show that certain operations are
capable of being accomplished by two or
more methods.

 Present economy study reduces to

determining the most economical among
the different methods.
 Selection of Design
 In the design of a machine to produce a
certain, the engineer responsible for the
work will usually make as many designs
as possible.

 Based from those designs, by elimination

the engineer will select the best design
suited for the work with particular care
with the one which will do the utmost
economy.
 Site Selection
 In the choice of a factory site many
factors that need to be considered are;
Cost of the land, construction cost at the
different possible sites, the availability of
skilled labor, and many other factors.

 In these factors care must be taken in the

economic study to include all pertinent
factors that will affect the work.
 Comparison of Proficiency of Workers
 Efficiency of workers is a factor in
affecting costs in the industrial
operations, because different workers
have varying skills.

 When the proficiency of workers can be

translated into monetary values, efficient
and diligent workers are paid with
higher wages.
 Economy of Tool and Equipment
Maintenance
 In many activities, tools have to be
sharpened from time to time, and
equipment have to be kept in optimum
operating condition all the time.

 Certain cases required experience to

indicate the best time to perform certain
operations to maintain equipment at the
highest level of efficiency.
Economy in the Utilization or Personnel
 It is observed in many industrial
operations that certain number of workers
cooperating on a specific phase of the
work will lead to highest productivity.

 If we increase the number of workers, It

will result in some being idle at certain
period while waiting for the work of
others to finish.
 Examples on selection of material
1. A machine part to be machined may be made
either from an alloy of aluminum or steel. There is
an order for 8000 units. Steel cost 3.80 php per kg,
while aluminum 8.70 php per kg. If steel is used,
the steel per unit weighs 110 grams; for aluminum,
30 grams. When steel is used 50 units can be
produced per hour; for aluminum, 80 units per
hour with the aid of a tool costing 640 Php, which
will be useless after the 8000 units are finished.
The cost of the machine and operator is 10.80 Php
per hour. Determine which material will be more
economical.

Steel cost of 8,000 units = Php 5,072

Aluminum = Php 3,808
 Ans. Aluminum is more economical
 Selection of Method
2. The ore of a gold mine in the Mountains
Province contains on the average, 0.5 gram of
gold per ton. One method of processing costs 1650
php per ton and recovers 93% of the gold, while
another method costs only 1500Php per ton and
recovers 81% of the gold. If gold can be sold at
8,500 php per gram, which method is better and
by how much?

Ans. The first method is better by 360Php.

 Selection of Method
3. A manufacturer has a contract to produce 5000
units of certain device. The device can be made by
highly trained workmen working individually.
The device can also be made by less skilled
workmen working together if they are given
specialized equipment and proper supervision.
The highly trained workmen are paid 20Php per
hour, and each can produce one unit every 2
hours, on the average .
 Selection of Method
The specialized equipment can be replaced in
operation at an original cost of 60,000Php and it
will be worthless at the time all the 5000 units are
manufactured. With this equipment four men,
paid 15Php per hour and a foreman, paid 25Php
per hour, can do the work. All the five men
working together can finish one unit in 15
minutes. Determine the gain or loss if specialized
equipment is used.

Ans. Gain of 33,750.

 Selection of Design
A company manufactures 1,000,000 units of a
product yearly. A new design of the product will
reduce material cost by 12%, but will increase
processing cost by 2%. If materials cost is 1.20Php
per unit and processing will cost 0.40Php per unit.
How much can the company afford to pay for the
preparation of the new design and making
changes in equipment.

Ans. Net savings on new design 136,000Php

 Site Selection
A certain masonry dam requires 200,000 cu.m of
gravel for its construction. The contractor found
two possible sources for the gravel with the
following data:
Source A Source B

1. Average distance, 3 km 1.2 km

gravel pit to dam
site

2. Gravel cost/cu.m
------ 10.00Php
at pit.
 Source A Source B
3. Purchase price of Pit 800,000 Php --------

4. Road construction 450,000 Php --------

necessary

5. Overburden to remove --------- 90,000 cu.m

at 4.20Php/cu.m

6. Hauling cost per cu.m 4.00 Php 4.00 Php

per km

Source B is cheaper by 312,000 Php

 Problems on Present Economy
The monthly demand for ice cream cans being
manufactured by Mr. Rivera is 3,200 pcs. With a
manually operated guillotine the unit cutting cost
is Php 50.00. An electrically operated hydraulic
guillotine was offered to him at a price of Php
300,000 and which reduced by 30% the unit
cutting cost. Disregarding the cost of money, how
many months will Mr. Rivera be able to recover
the cost of the machine if he decides to buy now?
 Problems on Present Economy
A jewelry craftsman needs 100 grams of gold
alloy containing 75% gold for his products. Only
two alloys of gold are available from a Davao
supplier, the first is 80% pure gold and the other
is 60% pure gold. How many grams of each gold
alloy must he buy to suit his requirement.
 Problems on Present Economy
A cement kiln with production capacity of 130
tons per 24 hours of clinker has its burning zone
about 45 tons of magnesite chrome bricks being
replaced periodically depending on some
operational factors and the life of the bricks. If
locally produced bricks cost Php 25,000 per ton
and have a life of 4 months, while certain
imported bricks costing Php 30,000 per ton and
have a life of 6 months, determine the more
economical bricks and by how much?
 Workers proficiency
Two workers, A and B, each produces 200 pieces
of a product per hour. Because of defects, 2% of
the pieces produced by B are rejected. These
defective pieces are repaired at a unit cost of Php
10 per piece. The cost of materials per piece is Php
22.50.

(a). If each worker is paid Php 450.00 per hour,

determine the cost per acceptable piece.
 Workers proficiency
(b). How much should A receive per hour in
order that his cost per acceptable piece will equal
that of B.

Ans: (a). Worker A = Php 24.75

Worker B = Php 24.95
(b). Php 490
 Equipment Maintenance
A machine used for cutting materials in a factory
has the following outputs per hour at various
speeds and requires periodic tool regrinding at
the intervals cited.
Speed output per hour tool regrinding
A 200 pieces Every 8 hours
B 250 pieces Every 7 hours
C 280 pieces Every 5 hours
 Equipment Maintenance
A set of tools costs Php 1,800 and can be grind
twenty times. Each regrinding costs Php 18.00
and the time needed to regrind and change tool is
1 hour. The machine operator is paid Php 450.00
per hour, including the time the tool is changed.
The tool grinder who also sets the tools to the
machine is paid Php 425.00 per hour. The hourly
rate chargeable against the machine is Php 100.00,
regardless of machine speed. Which speed is most
economical?
 Equipment Maintenance
Ans: Speed A cost/piece = Php 3.364
Speed B cost/piece = Php 2.761
Speed C cost/piece = Php 2.666
Speed C is most economical
 Utilization of Personnel
An executive receives an annual salary of Php
2,000,000 and his secretary a salary of Php 600,000
a year. A certain task can be performed by the
executive, working alone , in 4 hours. If he
delegates the task to his secretary it will require
him 30 minutes to explain the work and another
45 minutes to check the finished work. Due to
unfamiliarity of the secretary to do the task it
takes her an additional time of 6 hours after being
instructed.
 Utilization of Personnel
Considering salary cost only, determine the cost
of performing the task by each method, if the
secretary works 1,500 hours a year and the
executive 2,000 hours a year.

Ans: Executive alone = Php 4,000

Executive and Secretary together = Php 3,850
 Problems on Present Economy
A Project Engineer has 50 men of the same
capacity at work on a job. They can complete the
work in 30 days, the working day being 8 hours,
but the contract expire in 20 days. He decides to
put 20 additional men. If all the men get Php 350
per day for a full time work and the liquidated
damages are Php 1000 for every days extended on
the contract. How many days could he finish the
job and how much will be the savings if he pays
liquidated damage for the delay of the project.
 Problems on Present Economy
The quarrying cost of marble and granite blocks
plus delivery cost to the processing plant each is
Php 2,400 per cubic meter. Processing cost of marble
into tiles is Php 200 per square meter and that of
granite into tiles is Php 600 per square meter.
If marble has a net yield of 40 square meter of tiles
per cubic meter of blocks and sells at Php 400 square
meter, and granite gives net yield of 50 square meter
of tiles per cubic meter and sells at Php 1,000 per sq.
m. Determine the more profitable material and by
how much?