TOPIC 1 FOUNDATIONS OF

ENGINEERING ECONOMY

Engineering Economy
A discipline concerned with the
systematic evaluation of the costs and
benefits of proposed technical and business
projects and ventures.
This involves formulating, estimating,
and evaluating the expected economic
outcomes of alternatives designed to
accomplish a defined purpose.

GOODS AND SERVICES

Goods
1. Goods are tangible in nature i.e. they can
be seen and touched
2. There is a time gap between production
and consumption of goods as they are produced
first and consumed later.
3. They can be stored and utilized when
required.
4. They can be transferred from one place to
another.

 Services
1. Services are non-tangible in nature i.e.
they can neither be seen nor be touched.
2. There is no time gap between the
production and consumption of services. That is
why they are produced and consumed
simultaneously.
3. Services cannot be stored.
4. Transfer of service is not possible.

CONSUMER GOODS AND PRODUCERS

GOODS

Consumer goods
Consumer goods are those goods, which
satisfy the want of consumer directly. They are
goods, which are used for consumption. For
example bread, fruits, milk, clothes etc.
Producer goods
Producer goods are those goods, which satisfy
the want of consumers indirectly. As they help in
producing other goods, they are known as producer
goods. For example machinery, tools, raw materials,
seeds, manure and tractor etc are all example of
producer goods.

CONSUMER SERVICES AND PRODUCER

SERVICES
Consumers services
When the consumers or the households directly use
services, they are known as consumer services. For example
services of a tailor stitching your shirt or services of a doctor
giving you the treatment or services of a plumber repairing your
leaking tap, etc.
Producers services
Producer services on the other hand are used to produce
other goods and services, which are in turn demanded by the
consumers. In other words producer services satisfy the human
wants indirectly. For example a tailor stitches a shirt for a
readymade garment shop, an electrician repairs fault in the
electric supply in a production unit or even a truck- transporting
raw material to a factory.

TYPES OF COMPETITION
Perfect competition exists when there are
so many buyers and sellers that no single
buyer or seller can unilaterally affect the
price on the market.
Imperfect competition exists when a single
buyer or seller has the power to influence
the price on the market.

SUPPLY AND DEMAND

Supply
Supply is not just the amount of something
there, but the willingness and ability of potential
sellers to produce and sell it.
Demand
Used in the vernacular to mean almost any
kind of wish or desire or need. But to an
economist, demand refers to both willingness
and ability to pay.

LAW OF SUPPLY AND DEMAND

Law of Supply
The Law of Supply states that when the price of a
good rises, and everything else remains the same, the
quantity of the good supplied will also rise. In short,
P Qs
Law of Demand
The Law of Demand states that when the price of
a good rises, and everything else remains the same,
the quantity of the good demanded will fall. In short,
P Qd

FOUR BROAD CATEGORIES OF

MARKET TYPES
1. Perfect competition
a. Many sellers, so many that firms are price takers
b. Homogeneous product
c. Easy entry and exit
d. Perfect information about prices

2. Monopoly

a. One producer
b. Considerable power over price
c. Unique product
d. Very high barriers to entry

3. Monopolistic competition
a. Many firms
b. Differentiated products (is in general a
strategic marketing goal) products are close
substitutes to each other; we talk about a
product group if similar products
c. Demand curve not completely flat Firms
do not react to each others actions (because
there are so many)
d. Easy entry and exit
Examples: shirts, candy bars, restaurants,

4. Oligopoly
a. Few sellers dominate the market
b. Mutual interdependence
c. Repeated interaction

LAW OF DIMINISHING RETURN

The law of diminishing returns (also called
the Law of Increasing Costs) is an important
law of micro economics. The law of
diminishing returns states that:
"If an increasing amounts of a variable
factor are applied to a fixed quantity of other
factors per unit of time, the increments in
total output will first increase but beyond
some point, it begins to decline".