ECONOMY BOARD EXAM

ECONOMY

Cost or profit situation regarding a practical enterprise or project

ECONOMY

System of production, distribution, and consumption of goods and services

ECONOMICS

Study or science of production, distribution, and consumption of goods and services

ECONOMICS

Science that deals with attainment of the maximum fulfilment of society's unlimited demands for goods and service.

ENGINEERING ECONOMICS

Discipline concerned with economic aspects of engineering: it involved the systematic evaluation of the costs and benefits of proposed technical projects

ENGINEERING ECONOMICS

The application of engineering or mathematical analysis and synthesis to economic decisions

DEVELOP THE ALTERNATIVES

Carefully define the problem; decision is among the alternatives

FOCUS ON THE DIFFERENCES

Only consider differences on the alternatives in expected future outcomes

USE A CONSISTENT VIEWPOINT

Prospective outcomes should be consistently developed from a defined viewpoint (perspective)

USE A COMMON UNIT OF MEASURE

Simplifies the analysis of the alternatives

CONSIDER ALL RELEVANT CRITERIA

Selection of alternatives - use several criteria; should be relevant

MAKE RISK AND UNCERTAINTY EXPLICIT

Risk and uncertainties should be recognized in their analysis and comparison

REVISIT YOUR DECISION

Improved decision-making results from an adaptive process

GOODS

-Items for sale, or possessions that can be move

-Tangible (can be seen and touched)

SERVICES

-Doing things for customers

-Intangible (cannot be physically touched)

NECESSITY

Goods and services that are required to support human life, needs, and activities

LUXURY

Goods and services desired by human and will be acquired only after all necessities have been satisfied

CONSUMER GOODS AND SERVICES

Products/services that are directly used by people to satisfy their wants

PRODUCER GOODS AND SERVICES

Those that are used to produce consumer goods and services

COSTS

The amount of money needed to buy, do, or make something

DIRECT COST

Price that can be directly tied to the production of specific goods or services

INDIRECT COST

Difficult to attribute or allocate to a specific output or work activity

OVERHEAD COST

Consists of plant operating costs that are not direct labor or direct material costs

FIXED COST

Those unaffected by changes in activity level over a feasible range of operations for the capacity or capacity available

VARIABLE COST

Those associated with an operation that varies in total with the quantity of output or other measures of level

RECURRING COST

Those that are repetitive and occur when an organization produces similar goods or services continuously

NON-RECURRING COST

Not repetitive, even though the total expenditure may be cumulative over a relatively short period of time

CASH COST

Cost that involves payment of cash (and results in a cash flow)

NONCASH COST

"book cost"

• One that does not involve a cash transaction and is reflected in the accounting system as a noncash cost

SUNK COST

One that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action

Sunk Cost Fallacy

A psychological barrier that ties people to unsuccessful endeavors simply because they've committed resources to it

OPPORTUNITY COST

Forgone benefit that would have been derived by an option not chosen

INCREMENTAL COST/REVENUE

Additional cost or revenue that results from increasing the output of a system by one (or more) unit/s

STANDARD COST

Costs established in advance of actual production or service delivery

INVESTMENT COST

Capital required for most of the activities in the acquisition phase

OPERATION AND MAINTENANCE COST (O&M)

-Includes many of the recurring annual expense items associated with the operation phase of the life cycle

The direct and indirect costs of operation associated with five primary resource areas: people, machines, materials, energy and information

DISPOSAL COST

Includes those nonrecurring costs of shutting down the operation and the retirement and disposal of assets at the end of the life cycle

LIFE-CYCLE COST

Summation of all costs, recurring and nonrecurring, related to a product, structure, system, or service during its life span

CAPITAL

Wealth in the form of money or property that can be used to produce more wealth

EQUITY CAPITAL

A capital (as stock or surplus earnings) that is free of debt; especially received for an interest in the ownership of a business

DEBT CAPITAL

Money borrowed that must be repaid with interest

WORKING CAPITAL

Money used for daily operations

INTEREST

Payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate

DEMAND

Need, want or desire for a product backed by the money to purchase it

SUPPLY

The amount of a product made available for sale

LAW OF DEMAND

-If all other factors remain equal, the higher the price of a good, the less people will demand that good

-The higher the price the lower the demand

LAW OF SUPPLY

• If all other factors remain equal, the higher the price, the higher the quantity supplied

-Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue

LAW OF SUPPLY AND DEMAND

Under conditions of perfect competition, the price at which any given product will be supplied and purchased is the price that will result in the supply and the demand being equal

SURPLUS

Quantity supplied exceed demand at a certain price

SHORTAGE

Quantity supplied does not meet demand at a certain price

MARKET EQUILIBRIUM

Happens when at a certain price, supply meets demand

MARKET

Place where the vendors and buyers come together

BUYER/CONSUMER

Basic consuming or demanding unit of a commodity

SELLER

Entity which makes product, good or service available to buyer in exchange of monetary consideration

COMPETITION

Form of market structure where the number of suppliers is used to determine the type of market

PERFECT COMPETITION

Large number of vendors and there is no restriction for new sellers to enter the market

MONOPOLY

Characterized by a single seller selling a unique product in the market

PERFECT MONOPOLY

Only one vendor sells a unique product or service and they can prevent the entry of all other vendors in the market

OLIGOPOLY

Number of sellers is few, making the market share of each large enough that when there is a modest change of price by one seller, other sellers are opted to react to the change

SIMPLE INTEREST

-The simplest way money grows

• Interest is computed only from the original principal amount

ORDINARY SIMPLE INTEREST

Interest Based on one banker's year

EXACT SIMPLE INTEREST

Interest Based on exact number of days in a given year

COMPOUND INTEREST

-Interest earning interest

• Interest is added to the principal

CONTINUOUS COMPOUND INTEREST

-Interest is compounded every instant of time

• Maximum possible growth of money

RATE OF INTEREST

-Cost of borrowing money

• Also refers to the amount earned by a unit principal per unit time

NOMINAL RATE OF INTEREST (NR)

Specifies the rate of interest and a number of interest periods in one year

EFFECTIVE RATE OF INTEREST (ER)

Exact rate of interest earned on the principal during a 1-year period

DISCOUNT

-Difference between the future worth of a negotiable paper and its present worth

-Sale of stock or share at reduced price

RATE OF DISCOUNT

Discount on one unit per principal unit of time

CASH FLOW DIAGRAM

Visually represent income and expenses over some time interval

ANNUITY

Equal payments made at equal intervals of time

ANNUITY CERTAIN

Payments with a fixed and definite duration

ORDINARY ANNUITY

Payments are made at the end of each period beginning from the first period

ANNUITY DUE

Payments are made at the beginning of each period starting from the first period

DEFERRED ANNUITY

First payment does not begin until some later date in the cash flow

PERPETUITY

An annuity that continues forever

BONDS

-A fixed income investment representing a loan

-A fixed income instrument that represents a loan made by an investor to a borrower

FACE VALUE/PAR VALUE/PRINCIPAL VALUE

• The money amount the bond will be worth at maturity

• The reference amount the bond issuer uses when calculating interest payments

COUPON RATE

Rate of interest the bond issuer will pay on the face value of the bond, expressed as a percentage

COUPON DATES

Dates on which the bond issuer will make interest payments

MATURITY DATE

Date on which the bond will mature and the bond issuer will pay the bondholder the face value of the bond

ISSUE PRICE

Price at which the bond issuer originally sells the bonds

VALUE

The money worth of an asset or property

MARKET VALUE

• The amount a willing buyer will pay to a willing seller where:

• Both have equal advantage

• Neither is forced to buy or sell

BOOK VALUE

Worth of property reflected in the book of records of a company

USE VALUE

The value of a property based on its usefulness to the owner as an operating unit

FAIR VALUE

Value determined by a neutral or disinterested person to establish a fair amount for both buyer and seller

SALVAGE/SCRAP/RESIDUAL VALUE

Estimated value of an asset at the end of its useful life

PROPERTY

refers to any tangible or intangible asset that an individual, business, or government legally owns

DEPRECIABLE PROPERTY

Property for which depreciation is allowed under tax laws and regulations

TANGIBLE PROPERTY

Property that can be physically seen or touched

Personal Property

encompasses all tangible physical items that are movable and not permanently affixed to real estate

Real Property

includes land and anything permanently attached to it. It is fixed in place and cannot be easily relocated

INTANGIBLE PROPERTY

Property that has no physical form

-Personal property as a copyright, patent, or franchise

BASIS/COST BASIS (UNADJUSTED COST BASIS)

• The initial cost of acquiring an asset

• Purchase plus any sales taxes

ADJUSTED BASIS (ADJUSTED COST BASIS

• The updated value of an asset after adjustments

• Adjusted by allowable increases or decreases

RECOVERY PERIOD

Time needed to recover the cost of an asset