LESSON 1: BASIC ECONOMIC PRINCIPLE

Lesson Rationale:

This lesson contains the definition, principles, and design process, cost concepts for
decision-making, and present economic studies. The viewpoint of the student and the teaching
professional, to offer suggestions and modifications to curriculum structures allows for the
adjustment of knowledge based on decision-making, teaching, and learning experiences from an
engineering economy.

Lesson Outcomes:
At the end of the lesson, students are expected to:
1. Know the basic definition of engineering economy;
2. Understand the principles and process of engineering economics and its basic
terms;
3. Analyze the cost concepts for decision-making;
4. Influence the economy and industry through economic studies

Lesson Contents:
Topic 1: Definition and Principles of Engineering Economy
Topic 2: Basic Terms and Concepts of Decision Making
ASSESSMENT 1
ASSESSMENT 2

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TOPIC 1: Definition and Principles of Engineering Economy
Estimated Time: 1.5 hours

Topic Outcomes:
At the end of the topic, you are expected to:
1. Define the engineering, economy and engineering economy
2. Why engineering economy is important to engineers
3. Understand the principles of engineering economics

Topic Contents:

1.1 What is engineering?

Engineering is a profession in which the mathematical and natural sciences are used with
judgment to create methods for economically using the resources and forces of nature for the benefit
of mankind. This knowledge is acquired via study, experience, and practice.

1.2 What is economics?

The subject of economics focuses on how finite resources are used to satisfy unsatisfied
human desires. Additionally, it examines how people and society decide to use the limited resources
that nature and earlier generations have supplied.

What are these resources? Land, Labor, Capital.

1. Land is all gifts of nature, such as water, air, minerals, sunshine, plant, and tree growth,
as well as the land itself which is applied to the production process

2. Labor is the efforts, skills, and knowledge of people which are applied to the
production process.

3. Capital has three (3) Areas:

a. Real Capital (Physical Capital) - are tools, buildings, machinery - things

which have been produced and are used in further production.

b. Financial Capital –assets and money which are used in the production
process.

c. Human Capital - education and training applied to labor in the production

process.

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1.3 What is engineering economy?
Engineering Economy is a way to make decisions about money for engineering
systems. This definition might sound like it only applies to engineering projects
and systems, but engineering economy is actually the study of industrial economics and the
economic and financial factors that impact the industry. It is a group of techniques that compare
different choices based on their cost and value. But, it doesn’t help figure out the choice available.
It starts once the other options have been found. If there is a better choice that the engineer has not
even thought about then using any engineering economic analysis tools won’t help in selecting it.
Engineers are experts in machinery and production, so they are the most knowledgeable
judges in this field.
a) How long an asset can be used for;
b) They also know how to figure out many things that a new factory will make
when it’s running.

In today's business world, it is important for engineers to analyze the finances of business
and engineering projects and make logical decisions. The engineering economy also involves
learning about how manufacturing companies their finances. The special characteristics of
accounting for manufacturing companies are process costing, batch costing, and cost allocation.
Engineering economy is about finding out if a project is worth doing and choosing which
projects to do. A lot of engineers work on projects that focus on a specific task or issue. You have
to explain and give good reasons for any decision about the project.
In the business world, most decisions are based on making money, known as “profit”.
Managers are the ones who make these decisions and a lot of engineers end up becoming
managers in manufacturing settings. So, all engineers, no matter where they work, should know
the methods and tools used to evaluate projects.
Even though the engineering economy is mtly about choosing projects in businesses,
individuals and non-profit organizations like government, hospitals, and charities can also use the
tools and methods.

Engineering is the art of doing that well with one dollar which any bungler can do

with two (Arthur M. Wellington, 1887)

Engineering is more than

a problem-solving activity

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1.4 Why engineering economy is important to engineers?

The study of Engineering Economics is very useful because it helps professionals in the
industry make smart decisions for businesses. While knowing about macroeconomics and finance
is important for running a business, engineering economics helps with making decisions.
The following are why engineering is important to engineers:
1. Engineers design and create- design and build- what type of design is involved?
2. Designing involves economic decisions
3. Engineers must be able to incorporate economic analysis into their creative efforts
4. Often engineers must select and implement from multiple alternatives
5. Understanding and applying the time value of money, economic equivalence, and cost
estimation are vital for engineers
6. A proper economic analysis for selection and execution is a fundamental task of
engineering

1.5 Principles of Engineering Economics

To understand engineering economics, we need to start with the basic of its principles.
This includes studying and applying it in practice. Foundation engineering economy is a set of rules
that help us create a system for developing a way of doing things. You will become very skilled at
these principles as you continue with this module. When a problem or need is clearly identified,
the basic principles of the discipline can be discussed using seven (7) fundamental ideas.
1. Develop the Alternatives
Carefully define the problem! Then the choice or decision is among alternatives.
The alternatives to be identified and then defined for subsequent analysis. Developing and
defining the alternatives for detailed evaluation is important because of the resulting impact
on the quality of the decision. Creativity and innovation are essential to the process.

2. Focus on the Differences

Only the differences in expected future outcome among the alternatives are
relevant to the in comparison and should be considered in the decision. For example, if you
feasible housing alternatives were two residences with the same purchase (or rental) price,
price would be inconsequential to your final price. Instead, the decision would depend on
other factors, such as location and annual operating and maintenance expenses. This simple
example illustrates the Principle 2, which emphasizes the basic purpose of an engineering

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 economic analysis; to recommend a future course of action based on the differences among
feasible alternatives.

3. Use a Consistent Viewpoint

The prospective outcome of the alternatives, economic and other should be
consistently developed from a defined viewpoint or perspective. The perspective of the
decision maker, which is often that of the owners of the firm, would normally be used. The
viewpoint for the particular decision be first defined and then used consistently in the
description, analysis, and comparison of the alternatives.

4. 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 of the alternatives. You should also try to
translate other outcomes (which do not initially appear to be economic) into the monetary
unit. Using more than one monetary unit for Economic Analysis will complicate the overall
analysis of a project.

5. Consider All Relevant Criteria

Selection of a preferred alternative requires the use of several criteria. The decision
process should considerable both the outcome enumerated in the monetary unit and those
expressed in some other units of measurement or made explicit in a descriptive manner.
Often, though, there are other organizational objectives you would like to achieve with
your decision, and these should be considered and given weight in the selection of an
alternative.

6. Make Uncertainty Explicit

Risk and uncertainty are inherent in estimating the future outcomes of the
alternatives and should be recognized in their analysis and comparison. The probability is
high that today’s estimates of. Thus, dealing with uncertainty is an important aspect of
engineering economic analysis.

7. Revisit your Decisions

Improved decision making results from an adaptive process; to the extent
practicable, the initial projected outcomes of the selected alternative should be
subsequently compared with actual results achieved.

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Name: _____________________________________ Date: _________________

ASSESSMENT 1:
The assessment consists of questions carefully designed to help you self-assess your
comprehension of the information presented on the topics covered in the lesson. Read and
understand the questions carefully. Write your answer on the space provided.

1. Give your own examples (find a problem) and then, apply the fundamental principles of
engineering economy.

2. Choose one (1) why engineering economy is important to engineers and explain.

3. Why is engineering economics important to all of us?

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TOPIC 2: Basic Terms and Concepts of Decision Making
Estimated Time: 1.5 hours

Topic Outcomes:
At the end of the topic, you are expected to:
1. Define the decision-making and its role
2. Identify general steps in decision making
3. Analyze the steps of engineering economy study

Topic Contents:

1.6 Basic Terms

1. Tangible Factors- are those which can be expressed in terms of monetary values
2. Intangible Factors- are those which are difficult or impossible to express definitely in
terms of monetary values.
3. Perfect Competition- occurs a certain product is offered for sale by many vendors or
suppliers, and there is no restriction against other vendors from entering the market.
4. Monopoly- the opposite of perfect competition. Occurs when a unique product or service
is available only from a single supplier and entry of all other possible suppliers is
prevented.
5. Oligopoly- occurs when there are few suppliers and any action taken by anyone of them
will definitely affect the course of action of the others.
6. Price and Production- if prices go up, production will increase. If the price decrease,
production will also decrease or cease.
7. Local and National Market- defined to be a place where sellers and buyers come
together either. Goods exported to other countries are said to have a world market.
8. Consumer and Producer Goods- Consumer goods are those that are consumed or used
directly by people or are things and services which serve to satisfy human needs.
Producer goods are those which produce goods and services for human consumption
such as tools and ships.
9. Demand- is the quantity of a certain commodity that is bought at a certain price at a given
place and time.
10. Law of Demand- “states that the demand for a commodity varies inversely as the price
of the commodity, though not proportionately.”

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 11. Elastic Demand- occurs when a decrease in selling price will cause a greater than
proportionate increase in the volume of sales. Goods which are considered luxuries are
said to have elastic demand, because as small decrease in cost will usually result in a big
increase in sales.
12. Utility and Demand- Utility is defined to be capacity of a commodity to satisfy human
want. If the utility of a certain good to a certain individual is great, his demand for that
good will be great. However, if certain good has very small utility the demand will
likewise be small. Hence, the demand for a certain good varies directly as the utility.
13. Law of Diminishing Utility- An increase in the quantity of any good consumed or
acquired by an individual will increase the amount of satisfaction derived from that good.
14. Marginal Utility- is the utility of the last unit of the same commodity which is consumed
or acquired. The last unit of similar commodities or acquired is called the marginal unit.
15. Supply- is the quantity of a certain commodity is offered for sale at a certain price at a
given place and time.
16. Law of Supply- “states that the supply of a commodity varies directly as the price of the
commodity, though not proportionately.”
17. Law of Supply and Demand- the law may be stated, “When free competition exists, the
price of a product will be that value where supply is equal to the demand.”
18. Law of Diminishing Returns- states that “When one of the factors of production is fixed
in quantity or is difficult to increase, increasing the other factors of production will result
in a less than proportionate increase in output.

1.7 What is decision making?

Decision – a choice made from available alternatives

Decision Making- process of identifying problems and opportunities and resolving them.
The term engineering economic decision refers to all investment decisions
relating to engineering projects. The five main types of engineering economic
decisions are;
a. service improvement,
b. equipment and process selection,
c. equipment replacement,
d. new product and product expansion, and
e. cost reduction

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1.8 Characteristics of Decision Making
Efficient decision-making aims at developing the right communication network for
communicating all required information at different levels. Proper flow of information regarding
decisions within the organization avoids any confusion and conflict. Employees are too motivated
to participate in decision-making and come up with new ideas and facts.

The following are the decision-making characteristics.

1. Decision-making is a goal-oriented process.
2. It aims at achieving certain specifies goals of the organization.
3. Selection of process in which best alternative sources of action are chosen from
amongst alternative courses of action.
4. A continuous process because the manager is required to take decisions continuously
for different activities.
5. Consider both science and art
6. Responsibilities of managers at different levels of management
7. Decision-making involves deep and careful thinking and hence it is a mental process.
8. Decision-making can be both positive and negative
9. Decisions are made for further courses of action based on past experiences and present
conditions.

1.9 Importance of Decision Making

1. Decision-making is an important aspect of planning

2. Without a decision nothing can be done
3. Performing various aspects of management functions like planning, organizing, etc.
4. It helps to set objectives, prepare plans of action, introduce innovation, and determine
the organizational structure of the concern.

1.10 Basic Decision

The basic decision involved long-range commitment and large funds. Decisions with
regard to the selection of application, selection of a product line, and merger of the business are
known as Basic Decisions.
1. Routine decision- decisions that are to carry out the day-to-day activities.
2. Group decisions- are taken by a group of persons.
3. Individual decision- the decision is taken by one person.

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 Example: decision taken by the Board of Directors and the chief executive in the
interest of the organization as a whole.

4. Policy decision- is made at top levels. These decisions are taken to determine the basic
policies and goals of the organization.
5. Operating decisions- are taken to executive the policy decisions. These decisions are
taken at middle and lower management levels and are related to the routine activities
of a business.
6. Organizational decisions- are made by the executive in his/her capacity as a manager
in order to achieve the best interest of the organization. This decision can be delegated
to other members of the organization.
Example: adoption of strategies, framing on objectives, etc.
7. Personal decision- by the manager's personal capacity. This decision is not delegated.
Executive personal work
Example: Leave, medical surrender, etc.
8. Major decision- the decision with regard to the quality of the product, price of the
product and development a new product

1.11 Factors of Decision Making

In order to acquire, you must understand the factors of decision making of decision-
making and its process.
Certainty
 All the information the decision-maker needs is fully available

Risk
 Decision has clear-cut goals

 Good information is available

 Future outcomes associated with each alternative are subject to change
Uncertainty
 Managers know which goals they wish to achieve

 Information about alternatives and future events is incomplete
 Managers may have to come up with creative approaches to alternatives

Ambiguity

 By far the most difficult decision situation

 Goals to be achieved or the problem to be solved is unclear
 Alternatives are difficult to define

 Information about outcomes in unavailable
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
1.12 The Process of Decision-Making.

Managers and Engineers are constantly called upon to make decisions in order to solve
problems. Decision-making and problem-solving are ongoing processes of evaluating situations or
problems, considering ‐alternatives, making choices, and following them up with the necessary
actions. Sometimes the decision-making process is extremely short, and mental reflection is
essentially‐ instantaneous. The entire decision-making process is dependent upon the right
information being available to the right people at the right times.

1. Identifying the problem- recognizing problem-formulating the problem clearly and

completely.
2. Analyzing the problem- collection and classification of objectives or goals
3. Developing alternative solutions for the problem- sound decision- collect and identify
limited factors.
4. Evaluating the alternative- choose the best one or identify
5. Deciding the best course of action- the manager takes into account the economic risk
factor, the limitation of resources feasibility of its implementation, etc., past
experience, experimentation, and research and analysis. (select the decision to use)
6. Conversion of decision into actions- converted action, implement, and
communication, develop procedure. Select the best

1.13 Engineering Economic Decision

The term "engineering economic decision" refers to all investment decisions relating to
engineering projects. The most interesting facet of an economic decision, from an engineer’s point
of view, is the evaluation of costs and benefits associated with making a capital investment.

Figure 1.13.1 Process of Engineering Economic Decision

https://wps.prenhall.com/
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1.14 Role of Engineers in Business
Engineers play an essential role in your business during the processes of product
development and maintenance. Their skills help create products that pass quality assurance tests
for customers. With the help of the latest engineering software, Engineers design and produce the
building blocks of machines, products or systems.

Figure 1.14.1 Role of Engineers in Business

https://wps.prenhall.com/

In order to apply the process of decision making, you must understand the example related
to this lesson in order to master the process on how to be a successful business man/woman
someday.

Financial Data in order to make an economic decision

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1.15 Engineering Economic Studies
The four key steps in planning an economic study are:
1. Creative Step: People with vision and initiative adopt the premise that better
opportunities exist than are known to them. This leads to research, exploration,
and investigation of potential opportunities.
2. Definition Step: System alternatives are synthesized with economic
requirements and physical requirements, and enumerated with respect to
inputs/outputs.
3. Conversion Step: The attributes of system alternatives are converted to a common
measure so that systems can be compared. Future cash flows are assigned to each
alternative, consisting of the time-value of money.
4. Decision Step: Qualitative and quantitative inputs and outputs to/from each
system form the basis for system comparison and decision making. Decisions
among system

1.16 Predicting the Future

Your future is your success. You have to know and understand the basic principles and
process of decision making in order to have estimating idea.

1. Estimating a Required investment

2. Forecasting a product demand
3. Estimating a selling price
4. Estimating a manufacturing cost
5. Estimating a product life

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Name: _____________________________________ Date: _________________

ASSESSMENT 2:
The assessment consists of questions carefully designed to help you self-assess your
comprehension of the information presented on the topics covered in the lesson. Read and
understand the questions carefully. Write your answer on the space provided.

1. Give some examples of a problem that follows process of decision making and how
you can handle in order to accomplish?

2. What do you think the best TRAITS of PERSON when dealing with business?

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