LESSON 2-ECONOMICS

Fixed costs

expenses that remain constant regardless of the level of production or activity. These costs do not vary with changes in output in the short term. Examples: rent, insurance, salaries of permanent staff, and depreciation of machinery.

variable cost

on the other hand, fluctuate with the level of production or activity. They increase as production increases and decrease as production decreases. Examples: raw materials, direct labor, and utilities directly tied to production.

direct cost

expenses that can be traced directly and specifically to a particular product, project, or activity. These costs are incurred for the production of a specific item. For instance: the cost of raw materials used in manufacturing a product is a direct cost.

indirect cost

also known as overhead costs, are expenses that cannot be directly attributed to a specific product or activity. Instead, they are incurred to support overall operations. Examples: utility costs for the entire facility, administrative salaries, and general expenses.

marginal cost

refers to the additional cost incurred when producing one additional unit of output. It considers the change in total cost resulting from a change in production quantity. Marginal cost is crucial in making short-term production decisions, such as determining the optimal production level.

marginal revenue

the additional revenue earned from selling one additional unit of output. It is essential in pricing decisions and helps in determining the optimal selling quantity to maximize profits.

sunk cost

expenses that have already been incurred and cannot be recovered. They are irrelevant for future decision-making since they are in the past and cannot be changed. Engineers and decision-makers should ignore sunk costs when evaluating alternatives.

incremental cost

the additional costs incurred when choosing one alternative over another. They focus on the difference in costs between two choices. Incremental costs are essential in making decisions between alternatives because they provide insight into the additional expenses associated with a specific option.

present economic studies

play a crucial role in various fields, including business, engineering, and policy-making. These studies provide valuable insights and analysis that guide decision-makers in making informed choices.

1. market analysis and demand forecasting

2. feasibility studies

3. cost estimation techniques

4. economic life and replacement analysis

PRESENT ECONOMICS STUDIES…

market analysis

involves the examination and evaluation of market trends, dynamics, and competitive forces to understand the current state of a market. It helps businesses and policymakers identify opportunities and threats, assess market potential, and make strategic decisions.

demand forecasting

an integral part of market analysis, which involves predicting the future demand for a product or service. By understanding demand patterns, businesses can plan production, inventory management, and marketing strategies more effectively.

feasibility studies

comprehensive assessments conducted to determine the practicality and viability of a proposed project or initiative. These studies consider technical, economic, legal, operational, and scheduling factors. By conducting feasibility studies, decision-makers can identify potential risks, costs, and benefits associated with a project before committing significant resources.

cost stimation techniques

are used to predict the expenses associated with a project or operation. Accurate cost estimation is crucial for budgeting and resource allocation. Various techniques, such as parametric estimating, analogous estimating, and bottom-up estimating, are employed to determine the project's overall cost.

economic life analysis

involves determining the useful life of an asset or equipment from an economic perspective. It considers factors such as maintenance costs, operating expenses, and potential resale value.

replacement analysis

a decision-making process that assesses whether to replace an existing asset with a new one. By comparing the costs and benefits of continuing to use the current asset versus replacing it,

“When revenues and other economic benefits are present and vary among alternatives, choose the alternative that maximizes overall profitability based on the number of defect-free units of a product or service produced.”

rule 1 in conducting present economics studies

“When revenues and other economic benefits are NOT present and/or constant among all alternatives, consider only the cost and select the alternative that minimizes total cost per defect-free unit of product or service output.”

rule 2 in conducting present economics studies