Engineering Economy

1. MODULE 4
ENGINEERING
ECONOMY

15. MICROECONOMICS VS. MACROECONOMICS
Microeconomics: It is the study of markets, and
segments of the economy. It looks at issues such as
consumer behavior, individual labor markets, and the
theory of firms.
Micro economics is concerned with:
• Supply and demand in individual markets
• Individual consumer behavior. e.g. Consumer choice
theory
• Individual labor markets – e.g. demand for labor, wage
determination
• Externalities arising from production and
consumption. e.g. Externalities

16. • Macroeconomics : It is the study of the whole
economy. It looks at ‘aggregate’ variables, such as
aggregate demand, national output and inflation.
Macroeconomics is concerned with
• Monetary / fiscal policy.
• Reasons for inflation and unemployment.
• Economic growth
• International trade and globalization
• Reasons for differences in living standards and
economic growth between countries.
• Government borrowing

17. The difference between micro and macro economics
Micro Economics Macro Economics
Microeconomics is the study
of economics at an
individual, group or
company level
Macroeconomics is the study
of a national economy as a
whole.
It focuses on issues that
affect individuals and
companies. This could mean
studying the supply and
demand for a specific
product, the production that
an individual or business is
capable of, or the effects of
regulations on a business.
Macroeconomics focuses on
issues that affect the
economy as a whole. Some
of the most common focuses
of macroeconomics include
unemployment rates, the
gross domestic product of an
economy, and the effects of
exports and imports.

29. DECISION MAKING

44. INTEREST AND TIME VALUE OF MONEY
CASH-FLOW CONCEPTS
Cash flow is the stream of monetary (Rupees) values— costs (inputs)
and benefits (outputs)—resulting from a project investment.
TIME VALUE OF MONEY
The following are reasons why Rs.1000 today is “worth” more than
Rs.1000 one year from today:
1. Inflation
2. Risk
3. Cost of money
Of these, the cost of money is the most predictable, and, hence, it is
the essential component of economic analysis.

45. Interest Calculations
• Interest is the money paid for the use of borrowed money or the
return on invested capital.
• The economic cost of construction, installation, ownership, or
operation can be estimated correctly only by including a factor for
the economic cost of money.
 Nominal interest rate is also defined as a stated interest rate. This
interest works according to the simple interest and does not take
into account the compounding periods.
 Effective interest rate is the one which caters the compounding
periods during a payment plan.

46.  It is used to compare the annual interest between loans with
different compounding periods like week, month, year etc.
 In general stated or nominal interest rate is less than the
effective one. And the later depicts the true picture of financial
payments
SIMPLE INTEREST:
• Simple Interest is interest that is computed only on the original
sum and not on accrued interest.
• Thus if you were to loan a present sum of money P to some
one at a simple annual interest rate i (stated as a decimal) for a
period of n years, the amount of interest you would receive
from the loan would be:

47. Total interest earned = P x Ix N
At the end of n years the amount of money due you, F, would equal the
amount of the loan P plus the total interest earned. That is, the amount
of money due at the end of the loan would be
F = P(1+ i.n).
where,
P=Present sum of money (Rs,)
F=Future sum of money (Rs.)
n=Number of interest periods
i=Interest rate per period (%)

48. EFFECTIVE INTEREST RATE
• Let it be the nominal interest rate compounded annually. But, in
practice, the compounding may occur less than a year. For example,
compounding may be monthly, quarterly, or semi-annually.
• Compounding monthly means that the interest is computed at the end
of every month. There are 12 interest periods in a year if the interest
is compounded monthly.

49. What is Annuity?
An annuity is a plan that helps you to get a regular payment for life
after making a lump sum investment.
The life insurance company invests the money of the investor and
pays back the returns generated from it.
What are the different types of annuities?
Immediate annuity plans: There is no accumulation phase and the
plan starts working right from the vesting phase.
It is purchased with a lump sum and the annuity payment starts
immediately either for a limited tenure or lifetime.
Deferred annuity: These are the pension plans in which the annuity
starts after a certain date. It can be further divided into the
following:

50. • Accumulation phase- It is the phase when
you start investing and accumulating cash and
commences from the date when you first time
pay premium.
• Vesting phase- It is the date from which you
will start getting the policy benefits in the form
of pension.