ENGINEERING ECONOMY

Economics

The study of how people, businesses, and government choose to allocate scarce resources to satisfy their unlimited wants and needs

Microeconomics

Studies the behavior of individual economic units (consumers, firms, specific markets) and how prices are determined.

Macroeconomics

Studies the economy as a whole (National income and output, employment, inflation, overall economic growth)

Engineering Economy

the application of economic factors and criteria, together with engineering judgment, to the evaluation and comparison of engineering alternatives; to evaluate the worth of engineering projects, systems, products, and services in relation to their cost.

Agricultural Economics

resource allocation across the farm sector

Engineering Economics

evaluating a specific project's costs against its benefits

Market Economics

analyzing supply, demand, and pricing behavior

Financial Accounting

recording and reporting financial transactions

Law of Demand

As an item’s price goes up, people buy less of it; As the price goes down, people buy more

Law of Supply

As an item’s price goes up, makers want to supply more; As the price goes down, they make less

Price Elasticity of Demand

This measures how responsive quantity demanded is to a change in price.

Price Elasticity of Supply

This measures how responsive quantity supplied is to a change in price

Elastic

Quantity demanded changes proportionally more than price

Unitary elastic

Proportional change in quantity demanded equals the proportional change in price.

Inelastic

Quantity demanded changes proportionally less than price (typical of necessities, goods with few substitutes)

Perfectly Inelastic

Consumer will buy regardless of price.

Perfectly Elastic

Consumers will only buy at one specific price

Pure competition

price is set entirely by market forces

Monopoly

a single seller controls the price

Oligopoly

few sellers, with interdependent pricing decisions

Monopsony

a single buyer dictates the price

Quota

A limit on the physical quantity of a good that may be imported within a period

Tariff

A tax imposed on imported goods, raising heir price to consumers domestically

Balance of Trade

The difference between the value of a country’s exports and imports

Exchange Rate

The price of one country’s currency expressed in terms of another currency

Trade Liberalization

The removal or reduction of restrictions or barriers on free exchange of goods between nations

Trade Facilitation

Simplifying trade processes

Tariff Rationalization

Adjusting tariff rates

Import Quota Deregulation

Easing import limits

Gross Domestic Product

This is defined as the total market value of all final goods and services produced within a country’s borders in a given period

Gross National Product

The output owned by the country’s citizens/businesses, regardless of where it is produced.

Net Domestic Product

GDP minus Depreciation

Net National Product

GNP minus Depreciation

Net Factor Income from Abroad

(Income earned by residents abroad) – (Income earned by foreigners domestically)

Nominal GDP

GDP valued at current market prices (not adjusted for inflation)

Real GDP

GDP adjusted for inflation, using a base year

inflation

A sustained rise in the general price level of an economy, causing money to lose purchasing power.

Relative Price Change

A one-time price increase in a single good due to a temporary supply shortage

Deflation

A sustained fall in the general price level of an economy

Disinflation

A slowdown in the rate of price increases, though prices are still rising

Economies of Scale

Average cost per unit decreases as output/volume of a single product increases

Economies of Scope

Cost savings from producing multiple different products together using shared resources, facilities, or processes.

Minimum Efficient Scale

The smallest output level at which a firm fully captures all available economies of scale; further output increases do not lower average cost any longer.

Micro Enterprise

₱3,000,000 and below. 1-9

Small Enterprise

₱3,000,001 – ₱15,000,000, 10-99

Medium Enterprise

₱15,000,001 – ₱100,000,000. 100-199

Large Enterprise

More than ₱100,000,000. 200+

Fixed Cost

A cost unaffected by activity/output within a relevant range (insurance, salaries, loan interests)

Variable Cost

A cost that varies directly in total with output/activity level (materials, direct labor)

Total Cost

The sum of fixed and variable costs

Incremental Cost

Additional cost from increasing output by one or more units

Marginal Cost

The cost of producing exactly one more unit

Average Cost

The cost per unit at a given output level

Direct Cost

A cost that is reasonably measured and allocated to a specific output (labor, raw materials)

Indirect Cost

A cost that cannot be traced to one output; Used interchangeably with overhead/burden costs (Utilities, maintenance)

Standard Cost

Planned cost per unit established before production; used for budgeting, bid pricing, and variance control.

Cash Cost

A cost that involves an actual cash outlay, which appears in cash flow diagrams

Book Cost

These are non-cash costs; Recovery of a past expenditure (depreciation), matters only through its tax effect

Sunk Cost

A cost already incurred and irretrievable; Irrelevant to future decisions

Opportunity Cost

Value of the best forgone alternative use of a resource

Recurring/Periodic Cost

A cost that repeats at regular interval (annual maintenance, periodic overhaul)

Non-recurring/One-time Cost

A cost that occurs once (first cost, disposal costs)

Life-Cycle Cost

The sum of all costs over an asset’s life

Capitalized Cost

The present worth of an alternative with an infinite life, used for public infrastructures and permanent funds

Simple Interest

The interest that is computed only on the original principal for the entire term – it does not earn interest on interest

Compound Interest

The interest that is computed on the principal plus all previously accumulated interests; interests earn itself interest over time

Nominal Interest Rate

The stated annual interest rate that does not account for the effect of compounding within the year (e.g. 18% compounded monthly)

Effective Interest Rate

The true, actual rate of interest earned or changed in a year after accounting for the effects of compounding.

Annuity

A series of equal payments made at equal time intervals

Ordinary Annuity

Payments occur at the end of each period; most common type, used for most loans, mortgages, and standard investments.

Annuity Due

Payments occurring at the beginning of each period (rents, insurances, etc.); you pay before the coverage period starts.

Deferred Annuity

Payments are equal and regular, but the first payment does not start immediately; delayed by certain number of periods.

Perpetuity

An annuity that goes on forever; infinite equal payments at equal intervals.

Gradient Series

A cash flow pattern that changes by a fixed amount or percentage every period

Arithmetic (Uniform) Gradient

Cash flow increases (or decreases) by a constant amount (G).`

Geometric Gradient

Cash flow changes by a constant percentage (g)

Net Present Value

defined as the difference between the present value of benefits and the present value of costs over a project’s life

Internal Rate of Return

The rate at which a project's Net Present Value (NPV) becomes zero

Return on Investment

The percentage ratio that compares net profit to the cost of an investment

Pre-feasibility Study

Quick, initial evaluation in assessing project idea

Feasibility Study

It is an evaluation that tests if a new project, business idea, or plan is practical and likely to succeed

Technical Feasibility

Examines whether the project can be carried out with the available technology and resources.

Economic Feasibility

Analyzes the project’s financial viability, including costs and expected returns.

Operational Feasibility

Assesses whether existing systems and processes can support the project

Market Feasibility

Evaluates market demand and competitions.

Financial Feasibility

Focuses on the project’s financial sustainability and funding needs

Legal Feasibility

Reviews any legal or regulatory constraints that could impact the project

Schedule Feasibility

Determines whether the project can be completed timely

Income Statement

Details total revenue earned and expenses paid over a set time period to show net profit or loss.

Balance Sheet

Shows what a company owns (assets), what it owes (liabilities), and the owner’s stake (equity) at a specific date

Cash Flow Statement

It tracks actual cash coming in and going out

Financing; Investing

A cooperative received loan cash, spent cash on equipment, and collected cash from milk sales. Loan proceeds and equipment purchase classify under which Cash Flow sections, respectively

Revenue

Total inflow from sales, no deductions

Profit

Revenue minus costs; the money after expenses

Income

Formal term for profit, mostly referred to “Net Income”

Gross Profit

Revenue minus Cost of Goods Sold (COGS)

Net Income

Operating income minus interests and taxes

Return on Equity

Measures how much net income a company generates for every pesos of shareholder’s equity invested

Return on Asset

Measures profit generated per peso of total assets (regardless of how these assets are financed)

Liquidity Ratio

Measures if a firm can cover its short-term obligations with its assets