Chapter 2: Economic Concepts

Concepts of Value & Utility

Consumer & Producer Goods
Economic Aspects of Exchange
Classifications of cost
Life-Cycle Cost
Interest & Interest Rate
The Time Value of Money
The Earning Power of Money
The Purchasing Power of Money

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2.1 Concepts of Value & Utility

Value
a measure of the worth that a person
ascribes to a good or a service

Utility
a measure of the power of a good or
a service to satisfy human wants

2.2 Consumer & Producer Goods

Consumer Goods
The goods and services that directly
satisfy human wants. TV, PC, car,,

Producer Goods
the good and services that satisfy
human wants indirectly as part of the
production or construction process.
Tools, chips, materials,,,
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2.3 Economic of Exchange

Mutual Benefit in Exchange
an exchange will take place only if both parties
believe they will benefit.
Persuasion in Exchange
taking a person on a trip into the future in an
attempt to show and convince him what will
happen if he acts in accordance with a proposal.
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2.4 Classifications of cost

Capital Cost
O&M

Fixed Cost

Variable Cost

Marginal Cost

Sunk Cost

First Cost= Capital Cost= Initial Investment

The cost of getting an activity started.
Operation & Maintenance Cost (O&M): All
costs which keep the project running over its
economic life.[ fuel, operators, repair parts,,]
Fixed Cost: Costs which do not change as
output level changes in the short term. [R&D,
Taxes, lease rentals, interest on invested
capital,,]
Variable Cost: Costs which change as output
level changes in the short and long term[
material, labor, power cost].
Incremental or Marginal Cost: Additional
cost that will be incurred as the result of
increasing output by one more unit.
Sunk Cost: Cost incurred in the past and
cannot be changed by future action
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% of Cost
committed
100%

2.5 Life-Cycle Cost

75%

Life-cycle cost
all costs that
occur over the
life cycle.

50%
design operations

0%
N
E
E
D

Conceptual/
Preliminary
design

Detail design

Production/

Product/ System Use/

+ development

Construction

Phase-out/ Disposal
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Cost Generated Over Life Cycle

Total System/ Product Cost

R&D
Sys/Product Mgt
Product Planning
Engineering
Design
Design Documents
Sys/Product
Software
Sys/Product Test &
Evaluation

Product/Construct

O&M

Production/Construction Mgt

Sys/Prod Life
Cycle Mgt

IE & O analysis

Sys/Prod O

Manufacturing

Sys/Prod
Distribution

Construction
Quality Control
Initial Logistics
Support

Sys/Prod M
O&M Training

Phase Out
Disposal of
non-repairable
items
Sys/Prod
Retirement
Material recycle
Documentation

Sys/Prod
Modifications
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2.7 The Time Value of Money

Having a dollar today will allow you to invest it for a
number of years (n). Thus after n years, with an
interest rate > zero, you will have your $1 + interest.
Therefore, there is a relationship between interest
and time
The Time Value of Money
Your dollar today has an earning power and a
purchasing power.
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2.8 The Earning Power of Money

Your dollar has an earning power.
You must utilize this earning power to
your benefit in different ways:
Gaining interest on your available
funds,
Using the earning power of money on
the borrowed money.
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2.9 The Purchasing Power of Money

You also have to worry about inflation!
Inflation and deflation act to alter the
purchasing power of money

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