Basic Economic Environment and concept in Engineering Economy

1. Basic Economic Environment and Concept

2. What is Economics?
•Economics is the study of how individuals, businesses, and
societies allocate limited resources to satisfy their unlimited
wants and needs.
•It involves analyzing choices made by people in various
situations, understanding how markets function, and
examining factors influencing economic behavior.

3. What is Money?
•Money is a medium of exchange used to facilitate
transactions, store value, and measure the value of goods and
services.
•It eliminates the need for barter, allowing for smoother and
more efficient trade.

4. What is Engineering Economy?
•Engineering Economy applies economic principles to
engineering decision-making.
•It involves evaluating the economic feasibility of projects,
comparing alternatives, and selecting the most cost-
effective solutions.

5. Consumer and Producer Goods and Services
•Consumer goods and services are products meant for
personal use, like food, clothing, and entertainment.
•Producer goods and services are used in the production of
other goods and services, such as machinery and technology.

6. Necessities and Luxuries
•Necessities are essential items required for basic living, like
food, shelter, and healthcare.
•Luxuries are non-essential items that provide comfort and
pleasure, often beyond basic needs.

7. 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

8. Demand
•Demand is the quantity of a product or service that
consumers are willing and able to buy at various prices.
•Factors affecting demand include price, consumer income,
tastes and preferences, and the prices of related goods.

9. The demand for a product is inversely proportional to its selling price

10. Supply
•Supply refers to the quantity of a product or service that
producers are willing and able to offer at different prices.
•Factors influencing supply include production costs,
technology, government policies, and the prices of related
goods.

11. The relationship between price and supply is that they are directly proportional

12. The Law of Supply and Demand
•The Law of Supply states that, all else being equal, the quantity
supplied of a good rises as its price rises, and falls as its price falls.
•The Law of Demand states that, all else being equal, the quantity
demanded of a good rises as its price falls, and falls as its price rises.
•The equilibrium price is where supply and demand intersect,
indicating a balance between the quantity supplied and the
quantity demanded.

14. Present Economy
Involves economic problems which deals with immediate or
present situations and costs. The effect of time such as the time
value of money, interest and depreciation are negligible that is need
not be considered in the solutions to the problems.

15. Maxi Pro Bookstore purchased a best selling book at 200 Php per
copy. At what price should this book be sold so that by giving 20%
discount, the profit is 30% of the selling price
x = selling price
y = profit
y = 0.30x
Capital = 200 Php
Discount = 0.20x
Profit = selling price –capital – discount
y = x – 200 – 0.20x
0.30x = x – 0.20x – 200
0.30x = 0.80x – 200
200 = 0.50x
x = 400 Php

16. Intel Corporation’s gross margin is 45% of sales. Operating expenses
such as sales and administration are 15% of sales. Intel Corporation is
in 40% tax bracket. What percent of sales is their profit after taxes?
x = Sales
Gross margin = 0.45x
Operating expenses = 0.15x
Tax bracket = 40%
Net income = (0.45x – 0.15x) * 0.60
= 0.30x * 0.60
= 0.18x
Percent of sales = 18%

17. Simple Interest and Discount
Simple Interest(denoted by I) is defined as the interest on a loan or
principal that is based only on the original amount of the loan or
principal.
I = Pin
Where: P = principal/loan
I = interest
i = interest rate
n = period

18. Two types of simple interest
• Ordinary simple interest - based on a one banker’s year(12
months of 30 days)
n =
𝑑
360
where: d = number of days the principal was invested
• Exact simple interest – based on the exact number of days in a
given year.
normal year = 365 days
leap year = 366 days

19. • If 1,000 Php accumulates to 1,500 Php when invested at a
simple interest for three years, what is the rate of interest?

20. • A loan of 5,000 Php is made for a period of 15 months, at a
simple interest rate of 15%, what future amount is due at the
end of the load period?

21. • If you borrowed 10,000 Php from a bank with 18% interest per
annum, what is the total amount to be reparid at the end of one
year?

22. Simple Discount
Discount = Future worth – Present worth
Is an interest deducted right away
d =
𝐷𝑖𝑠𝑐𝑜𝑢𝑛𝑡
𝐹𝑢𝑡𝑢𝑟𝑒 𝑊𝑜𝑟𝑡ℎ
x 100%

23. Relationship of discount rate and interest rate
d = 1 -
1
1+𝑖
i =
𝑑
1 −𝑑
d =
𝑖
1+𝑖

24. • Engr. Lapong borrowed Php 10,000 from a bank and promised
to pay the amount in 1 year. But he received Php 9,600 only
after the bank deducted an advance interest of Php 400. Find a)
the rate of discount and b) the rate of interest that the bank
charged him.

25. • Ms. Bautista borrowed money from the bank. She receives from
the bank 1,340 Php and promised to pay 1,500 Php at the end of
9 months. Determine the following:
a. Simple interest rate
b. The corresponding discount rate

26. Compound Interest is defined as the interest of loan or principal
which is based not only on the original amount of the loan or
principal but the amount of the loan or principal plus the previous
accumulated interest. It is frequently used in commercial practice
than simple interest, more especially if it is a longer period which
spans for more than a year.
F = P(1+i)n
P = Principal
i = interest per period (in decimal)
n = number of interest periods

28. Continuous Compounding ---- compounding occurs is tending to
infinity
The continuous compounding formula should be used when they
mention specifically that the amount is "compounded continuously"
in a problem.

29. F = P(1+i)n
Joey deposited 1,000 Php in an account with annual compound interest rate of 8%,
compounded 4 times a year.
a. How much will be there after 20 years?
P = 1000; i = (0.08/4 ) = 0.02; n = (20 years * 4 times/year) = 80 periods
F ≈ 4,875.439 Php
b. How much will be there after 20 years if compounded 100 times a year?
F ≈4,949.865 Php
c. How much will be there after 20 years if compounded 1000 times a year?
F =4,952.715 Php
d. . How much will be there after 20 years if compounded 10000 times a year?
F =4,953.000 Php

30. John deposited 1,000 Php in an account compounded continuously.
a. If r = 8%, how much will be there after 20 years?
P = 1000
r = 0.08
t = 20
A = 1000*e(0.08*20) ≈ 4953.032 Php
b. If r = 12%, how much will be there after 20 years?

31. Kelly invested $5000 in a bank that pays an annual interest rate of 9%
compounded continuously. What is the amount he can get after 15 years from the
bank?

32. What should be the rate of interest for the amount of 5,300 Php to become
double in 8 years if the amount is compounding continuously?
P = 5,300 Php
A = 2*5, 300 (doubled in 8 years) = 10,600 Php
t = 8 years
10600 = 5300 * 𝑒8𝑟
2 = 𝑒8𝑟
ln 2 = 8r
r = (ln 2)/8 ≈ 0.0866
r = 8.66 %

33. Annuity is a sequence of equal payments at equal or fixed interval
or period of times.
Examples:
Installment payments
Rental payments
Life insurance
Wages
Pensions

34. Types of Annuities
ANNUITY CERTAIN - whose term is fixed when the term starts
and ends on definite date. Ex. Monthly payment of appliances
CONTINGETN ANNUITY – whose term depends upon some
uncertain events. Ex. Life insurance; pensions

35. Classification of Annuities
Ordinary annuity – whose payments are made at the end of each
payment interval
Example: An annuity of 400 Php payable every end of the
month for 7 years at 7% compounded monthly.
Annuity due – whose payment are made at the beginning of each
payment interval
Example: an investment of 2,000 Php is made at the
beginning of each month for 5 years at 9% compounded quarterly.

36. Classification of Annuities
DEFERRED ANNUITY – whose first payment is to start at some
future date
Example: An annuity of 500 Php every 3 months is to be paid
for 9 years if first payment is made at the end of 2 years where r =
8%