CE40/E03

ACTIVITY

CPR # 1

Terminologies to be defined:
1. Economics
– It is the act of making decisions on how to properly allocate limited resources to satisfy the
consumer's wants and needs. It focuses on production, distribution and transfer of wealth of
goods and services relative to the consumer and producer. It is a social science concerned
with the production, distribution and consumption of goods and services. It is the theories,
principles and models that deal with how market process works. It attempts to explain how
wealth is created and distributed in communities, how people allocate resources that is
scarce.

2. Engineering Economy (and who is the Father?)

- quantifies the benefits and costs associating with engineering projects to determine if they save
enough money to warrant their capital investments. Engineering economics requires the
application of engineering design and analysis principles to provide goods and services that
satisfy the consumer at an affordable cost. It involves the systematic evaluation of the economic
merits of proposed solutions to engineering problems. The father of Engineering Economics is
Eugene L. Grant

3. Engineering Economic Analysis (and who is the Founder?)

- Is a breakdown of the various options for an engineering project based on its overall costs. These
reports allow companies to decide which option works best from a profit standpoint before they begin
the project. Arthur M. Wellington is considered as the founder. Arthur wellington is said to be the
founder of Engineering Economics Analysis. He applied economic analysis by using capitalized cost
method of analysis to select the preferred lengths of rail lines of curvatures.

4. Consumer Goods / Services

–are those products or services are directly used by people to satisfy their wants. Food, Clothing,
Homes, Cars, Television Sets, Haircuts, Opera and medical services are examples.

5. Producer Goods / Services

- Are used to produce consumer goods and services or other products. Machine tools, Factory
Buildings, Buses, and Farm machine are examples.

6. Necessities
- It is the products or services that the consumer needs for them to survive on a day to day basis
such as food, water, shelter and clothing. They are indispensable and are constant on behalf of
maintaining a certain “minimum “ standard of living.

7. Luxuries
- Are product or services that the consumer wants and are technically unnecessary. They are
dispensable and is dependent on the income of an individual , relative to the price of the item
or service that they want.

8. Demand
-Is the quantity of goods and services that is desired by the consumers. It is based on the fact on
how desirable a product is for the buyer and how much are they willing to spend for it.

9 Supply
 - Is defined as “how much the market can offer”. It is the availability of the product or service
relative to its demand in the market or the consumer.

10 Elastic Demand
- Elastic demand means that demand for a product is sensitive to price changes. For
example, if the selling price of a product is increased, there will be fewer units sold. If the
selling price of a product decreases, there will be an increase in the number of units sold.
Elastic demand is also referred to as the price elasticity of demand.

11 Inelastic Demand
- It means that the demand for a product is not sensitive to price changes.

12 Unitary Elasticity
- Unitary elastic is when percentage change in price of a commodity is equal to the percentage
change in quantity demanded of that good.

13 Perfect Competition
- Perfect competition is a market structure where many firms offer a homogeneous product.
Because there is freedom of entry and exit and perfect information, firms will make normal profits
and prices will be kept low by competitive pressures.

14 Monopoly
-It is the opposite pole from perfect competition. A perfect Monopoly exists when a unique
product or service is only available from single supplier and that vendor can prevent the entry of
all others in the market.

15 Oligopoly
- Oligopoly is a market structure with a small number of firms, none of which can keep the
others from having significant influence. The concentration ratio measures the market share
of the largest firms.

16 Law of Supply and Demand

- The law of supply and demand is a theory that explains the interaction between the supply of
a resource and the demand for that resource. The theory defines the effect that the availability
of a particular product and the desire (or demand) for that product has on its price.

17 Law of Diminishing Returns

- The law of diminishing marginal returns states that, at some point, adding an additional factor of
production results in smaller increases in output. For example, a factory employs workers to
manufacture its products, and, at some point, the company operates at an optimal level.

18 Valuation
-Is concerned with determining the current worth of an asset based on the selling price of similar
products and services.

Enumerate and give a brief description for each:

1. Functions and Uses of Engineering Economy

a. DEVELOP THE ALTERNATIVES
 - The choice (decision) is among alternatives. The alternatives need to be identified and then
defined for subsequent analysis.
b. FOCUS ON THE DIFFERENCES
- Only the differences in expected future outcomes among the alternatives are relevant to
their comparison and should be considered in the decision.
c. USE A CONSENT VIEWPOINT
- The prospective outcomes of the alternatives, economic and other, should be consistently
developed from a defined viewpoint.
d. USE A COMMON UNIT OF MEASURE
- Using a common unit of measurement to enumerate as many of the prospective outcomes
as possible will simplify the analysis and comparison of the alternatives.
e. CONSIDER ALL RELEVANT CRITERIA
- Selection of a preferred alternative (decision making) requires the use of a criterion(or
several criteria)
f. MAKE UNCERTAINTY EXPLICIT
- Uncertainty is inherent in projecting the future outcomes of the alternatives and should be
recognized in their analysis and comparison.
g. REVISIT YOUR DECISIONS
- Improved decision making results from an adaptive process; To extent practicable, the initial
projected outcomes of the selected alternatives should be subsequently compared with
actual results achieved.

2. Engineering Economy Techniques

a. FUTURE WORTH ANALYSIS
- Future worth analysis, dealing with then rather with now situations,
b. BENEFIT-COST RATIO ANALYSIS
- It is a type of analysis that is based on rations in comparison.
c. PAYBACK PERIOD
- It is an approximate analysis technique, generally defined as the time required for
cumulative benefits to equal cumulative costs.
d. SENSITIVITY AND BREAK ANALYSIS
- Sensitivity describes the relative magnitude of a particular variation in one or more elements
of a problem that is sufficient to change a particular decision.
3. Engineering Economic Analysis Procedures
a. PROBLEM DEFINITION
- The researcher identifies the problem and evaluates the necessary information to solve it.
b. DEVELOPMENT OF FEASIBLE ALTERNATIVES
- The researcher finds plausible alternatives or options that can solve the problem in terms of
resourcefulness and creativity.
c. DEVELOPMENT OF THE OUTCOMES AND CASH FLOWS FOR EACH ALTERNTIVES
- It is where the researcher creates a set of plausible outcome to which the available resource
may be allocated efficiently.
d. SELECTION OF CRITERION
- These are the standards that must be attained for the alternative function effectively for long
term interest of clients, organizations, concerns, etc.

e. ANALYSIS AND COMPRISON OF ALTERNATIVES

- The researcher analyzes the alternatives carefully and compares them with one another in
terms of their feasibility and other factors based on cash flows, exchange rates, inflations,
regulatory, etc.

f. SELECTION OF PREFERRED ALTERNATIVES

- It is where the most agreeable alternatives is chosen out of all options. It is also the process of
technical-economic modelling.

g. PERFOMANCE MONITORING AND POST MONITORING RESULTS

- The researcher shall conduct the alternative as researched and shall monitor the
effectiveness of the results as well as give recommendations.

4. Intangible Values
a. CUSTOMER EXPERIENCE
- Customer experience such as the usability of a device or service on a flight.
b. BRAND
- The identity and reputation of a brand.
c. ORGANIZATIONAL CULTURE
- A firm with a productive and creative organizational culture that regularly produces
innovation where others struggle.
d. TALENT
- Talent in areas such as leadership, design, engineering, marketing and sales.
e. KNOW-HOW
- Practical knowledge that allows you to do real things.

f. INTELLECTUAL PROPERTY
- Intellectual property such as trade secrets, designs, patents, copyright, trademarks and
 trade dress.
g. RELATIONSHIPS
- Relationships with customers, employees, partners and communities.

5. Costs
a. FIXED COST
- Are those unaffected by the changes in activity level over feasible range of operations for
the capacity or capability available.

b. VARIABLE COST
- Are those associated with an operation that varies in total with the quantity of output or
other measures of activity level.

c. INCREMENTAL COST
- It is the additional cost that results from increasing the output of a system by one or more
units.

d. RECURRING COST
- Are those that are repetitive and occur when an organization produces similar goods or
services on a accounting basis.

e. NONRECURRING COST
- Are those which are not repetitive, even though the total expenditure may be cumulative
over a relatively short period of time.

f. DIRECT COST
- Are costs that can be reasonably measured and allocated to a specific output or work
activity.

g. INDIRECT COST
- Are costs that are difficult to attribute or allocate to a specific output or work activity.
h. STANDARD COST
- Are representative costs per unit of output that are established in advance of actual
production or service delivery.

i. CASH COST
- A cost that involves payment of cash.
j. NONCASH COST
- expense is an expense that is reported on the income statement of the current accounting
period, but there was no related cash payment during the period.

k. SUNK COST
- These are costs that have been incurred and cannot be recouped. If you left the industry,
you could not reclaim sunk costs. For example, if you spend money on advertising to enter
 an industry, you can never claim these costs back. If you buy a machine, you might be able
to sell if you leave the industry.

l. OPPORTUNITY COST
- Opportunity cost is the next best alternative foregone. If you invest £1million in developing a
cure for pancreatic cancer, the opportunity cost is that you can’t use that money to invest in
developing a cure for skin cancer.

m. LIFECYCLE COST
- an asset is defined as: “The total cost throughout its life including planning, design,
acquisition and support costs and any other costs directly attributable to owning or using the
asset”.

n. INVESTMENT COST
- The amount of money spent for the investment, investment expenditure required to exercise
the option (cost of converting the investment opportunity into the option’s underlying asset,
i.e. the operational project).

o. OPERATION AND MAINTENANCE COST

- are expenses associated with the maintenance and administration of a business on a day-
to-day basis.

p. DISPOSAL COST
- Costs that can be avoided. If you stop producing cars, you don’t have to pay for extra raw
materials and electricity. Sometimes known as an escapable cost.

6. Overlapping Costs

a. OPPORTUNITY COST AND ACTUAL COST

- Opportunity cost refers to the loss of earnings due to opportunities foregone due to scarcity of
resources. If resources were unlimited, there would be no need to forego any income-yielding
opportunity and, therefore, there would be no opportunity cost. Resources are scarce but
have alternative uses with different returns. Incomes maximizing resource owners put their
scarce resources to their most productive use and forego the income expected from the
second-best use of the resources.

b. BUSINESS COST AND FULL COST

- Business costs include all the expenses which are incurred to carry our business. These cost
concepts are used for calculating business profits and losses and for filling returns for income-
tax and also for other legal purposes. Full costs, on the contrary, include business costs,
opportunity cost and normal profit

c. EXPLICIT AND IMPLICIT OR IMPUTED COSTS

- Explicit costs refer to those which fall under actual or business costs entered in the books of
accounts. The payments for wages and salaries, materials, license fee, insurance premium,
depreciation charges are the examples of explicit costs. These costs involve cash payments
and are recorded in normal accounting practices.

d. OUT-OF-POCKET AND BOOK COSTS

- Out-of-pocket costs means costs that involve current cash payments to outsiders while book
costs such as depreciation do not require current cash payments.
7. Payments
a. CASH
- Cash is one of the most common ways to pay for purchases. Both paper money and coins
are included under the larger category of "cash." While cash has the advantage of being
immediate, it is not the most secure form of payment since, if it is lost or destroyed, it is
essentially gone.

b. CREDIT AND DEBIT CARD

- Credit cards look like debit cards. But paying with a credit card temporarily defers the buyer's
bill. At the end of each month, the buyer receives a credit card statement with an itemized list
of all purchases.

c. DIRECT DEBIT
- Paying with a debit card takes the money directly out of the buyer's account. It is almost like
writing a personal cheque, but without the hassle of filling it out.

d. BILL OF EXCHANGE
- A bill of exchange is a written order used primarily in international trade that binds one
party to pay a fixed sum of money to another party on demand or at a predetermined date.

e. ONLINE

- Payment that is transacted via online.

f. PROMISSORY NOTE
- A promissory note is a financial instrument that contains a written promise by one party (the
note's issuer or maker) to pay another party (the note's payee) a definite sum of money,
either on demand or at a specified future date.

g. CHEQUE
- A check is a written, dated and signed instrument that contains an unconditional order from
the drawer (also called the payor) that directs a bank to pay a definite sum of money to a
payee.

h. MONEY ORDER
- A money order is a certificate, usually issued by governments and banking institutions, that
allows the stated payee to receive cash on demand. A money order functions much like a
check, in that the person who purchased the money order may stop payment.

i. VOUCHER
- A voucher check is a two-part combination of a check and voucher. Also known as a
remittance advice, the voucher creates a paper trail for the payment by the issuer of the
check.
REFERENCES
Library Receipt of reference borrowed