Basic Concepts of

Economics
What is Economics?
What is Economics?
Economics is a science that deals with the
attainment of the maximum fulfilment of
societys unlimited demands for goods and
services
What is Engineering Economics?
What is Engineering Economics?
Engineering Economics is the branch of
economics that deals with the application
of the laws and theories of economics to
engineering and technical projects
What are Consumer and Producers
Goods and Services?
Consumer goods and services
What are Consumer and Producers
Goods and Services?
Consumer goods and services refer the
products or services that are directly used
by people to satisfy their wants. Examples
are food, clothing, shelter or home, etc.
What are Consumer and Producers
Goods and Services?
Producer goods and services
What are Consumer and Producers
Goods and Services?
Producer goods and services are those that
are used to produce the consumer goods
and services
What is the difference between Necessity
and Luxury?
Necessity
What is the difference between Necessity
and Luxury?
Necessity refers to the goods and services
that are required to support human life,
needs and activities.
What is the difference between Necessity
and Luxury?
Necessity product or staple product
What is the difference between Necessity
and Luxury?
Necessity product or staple product is
defined as any product that has income-
elasticity of demand less than one. This
means that as income rises,
proportionately less income is spent on
such products. Examples include basic
foodstuff like bread and rice, clothing, etc.
What is the difference between Necessity
and Luxury?
Luxuries
What is the difference between Necessity
and Luxury?
Luxuries are those goods and services that
are desired by human and will be acquired
only after all the necessities have been
satisfied.
What is the difference between Necessity
and Luxury?
Luxury product
What is the difference between Necessity
and Luxury?
Luxury product is defined as any product
that has income-elasticity of demand
greater than one. This means that as
income rises, proportionately more income
is spent on such products. Examples
include consumer durables like
appliances, expensive cars, holidays and
entertainment, etc.
What are the different market
situations?
The term market refers to the exchange
mechanism that brings together the sellers
and the buyers of a product, factor of
production or financial security. It may
also refer to the place or area in which
buyers and sellers exchange a well-
defined commodity.
What are the different market
situations?
Buyer or consumer is defined as the basic
consuming or demanding unit of a
commodity. It may be an individual
purchaser of a good or service, a
household (a group of individuals who
make joint purchasing decisions), or a
government.
What are the different market
situations?
Seller is defined as an entity which makes
products, goods or services available to
buyer or consumer in exchange of
monetary consideration.
What are the different market
situations?
Market Situation Sellers Buyers

Perfect Competition many many

Monopoly one many

Monopsony many one

Bilateral Monopoly one one

Duopoly two many

Duopsony many two

Oligopoly few many

Oligopsony many few

Bilateral Oligopoly few few

What are the different market
situations?
Perfect competition refers to the market
situation in which any given product is
supplied by a very large number of
vendors and there is no restriction against
additional vendors from entering the
market.
What are the different market
situations?
Perfect competition is characterized by the
following:
A. Many sellers and many buyers
B. Homogeneous products
C. Free market entry and exit
D. Perfect information
E. Absence of all economic friction
What are the different market
situations?
Monopoly is the opposite of perfect
competition. This market is characterized
by the following:
A. One seller and many buyers
B. Lack of substitute products
C. Blockaded entry
What are the different market
situations?
Natural Monopoly is a market situation
where economies of scales are so
significant that costs are only minimized
when the entire output of an industry is
supplied by a single producer so that
supply costs are lower under monopoly
than under perfect competition and
oligopoly.
What are the different market
situations?
Oligopoly exists when there are so few suppliers of a
product or service that the action of one will
inevitably result in a similar action by the other
suppliers. This type of market is characterized by the
following:
A. Few sellers and many buyers
B. Homogeneous of differentiated products
C. Difficult market entry
What is a Demand?
What is a Demand?
Demand is the need, want or desire for a
product backed by the money to purchase
it. In economic analysis, demand is
always based on willingness and ability
to pay for a product, not merely want or
need for the product.
What is a Demand?
The demand for a product is inversely
proportional to the selling price. As the
selling price is increased, there will be less
demand for the product and as the selling
price is decreased, the demand will
increase.
What is a Supply?
What is a Supply?
Supply is the amount of product made available for
sale.

If the selling price for a product is high, more

producers will be willing to work harder and risk
more capital in order to reap more profit. However, if
the selling price of the product declines, capitalists
will not produce as much because of the smaller
profit they can obtain for their labor and risk.
What is a Supply?
Therefore the relationship between price
and supply is that they are directly
proportional. The bigger the selling price,
the more the supply, and the smaller the
selling price, the less the supply.
What is the Law of Supply and Demand?
What is the Law of Supply and Demand?
The Law of Supply and Demand is stated
as follows:
Under conditions of perfect competition,
the price at which the given product will
be supplied and purchased is the price that
will result in the supply and the demand
being equal.
 Introduction to
Engineering Economy
ORIGIN OF ENGINEERING ECONOMY
Arthur Mellen Wellington or known as A.M Wellington
was a railway civil engineer of his time. He became
famous because of his book entitled The Economic
Theory of the Location of Railways which was published
by John Wiley and Sons in 1887. The book was subtitled
as an analysis of the conditions controlling the laying
out of railways to effect the most judicious use of capital.
Wellington was later known as the Father of
Engineering Economy.

Source: http://mysite.du.edu/~jcalvert/railway/wellingt.htm
During your first month as an employee at Greenfield Industries (a large drill-bit
manufacturer), you are asked to evaluate alternatives for producing a newly designed
drill bit on a turning machine. Your boss memorandum to you has practically no
information about what the alternatives are and what criteria should be used. The
same task was posed to a previous employee who could not finish the analysis, but
she has given you the following information: An old truing machine valued at
$350,000 exist (in the warehouse) that can be modified for the new drill bit. The in-
house technicians have given an estimate of $40,000 to modify this machine and they
assure you that they will have the machine ready before the projected start date
(although they have not done any modifications of this type). It is hoped that the old
turning machine will be able to meet production requirements at full capacity. An
outside company, McDonald Inc., made the machine 7 years ago and can easily do
the same modifications for $60,000. The cooling system used for this machine is not
environmentally safe and would require some disposal costs. McDonald Inc. has
offered to build a new turning machine with more environmental safeguards and
higher capacity for a price of $450,000. McDonald Inc. has promised this machine
before the start up date and is willing to pay any late costs. Your company has
$100,000set aside for the start-up of the new product line of drill bits. For this
situation,
a. Define the problem
b. List key assumptions.

c. List alternatives facing Greenfield Insdustries.

d. Select a criterion for evaluating of alternatives.

e. Introduce risk into the situation.

f. Discuss how nonmonetary considerations may impact the selection.

Application of Engineering Economic Procedure
Sheila bought a small apartment building for
$100,000 in a college town. She spent $10,000 of
her own money for the building and obtained a
mortgage from a local bank for the remaining
$90,000. The annual mortgage payment to the bank
is $10,500. Sheila also expects that annual
maintenance on the building and grounds will be
$15,000. There are four apartments each with two
bedrooms in the building that can each be rented
for $360 per month.
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p13
Application of Engineering Economic Procedure
a. Does Sheila have a problem?
b. What are her alternatives? Identify at least three.
c. Estimate the economic consequences and other required
data for the alternative in part b.
d. Select criterion for discriminating among alternatives and
use it to advise Sheila on which course of action to
pursue.
e. Attempt to analyze and compare the alternatives in view
of at least one criterion in addition to cost.
f. What should Sheila do based on the information you have
generated?
Source: Sullivan, William G., Elin M. Wicks and James T. Luxhoj. (2006).
ENGINEERING ECONOMY, 13TH ED. Pearson-Prentice Hall. p13