BES – Engineering Economics MICROECONOMICS

- Is the branch of economics that studies

NOTES 1
the behavior and decision making of
ENGINEERING ECONOMICS NOTES individual entities, such as households,
firms and industries.
 Engineering Economics – the study of cost
Example:
factors involved in engineering projects.
 Interest – is the amount of money earned by 1. Consumer Behavior: How an
a given capital individual decides to allocate their
 Investment – the sum of first cost and budget between groceries and
working capital which is being put up in a entertainment.
project with the aim of getting a profit. 2. Price Determination: The pricing of a
 Fixed Capital – A part of an investment which product, like the cost of an iPhone,
is required to acquire or set up a business. based on supply and demand.
 Working Capital – the amount of money set 3. Firm Decisions: A company deciding
aside as part of an investment to keep the how many employees to hire or
project or business continuously operating. whether to invest in new machinery.
 Demand - the quantity of a certain
MACROECONOMICS
commodity that is bought at a certain price at
a given place and time. - deals with the economy as a whole. It
 Supply – the quantity of a certain commodity focuses on large-scale economic factors,
that is offered for sale at a certain price at a such as national income, inflation,
given place. unemployment, economic growth, and
 Perfect Competition – a business condition in government policies. It examines how the
which a product or service is supplied by a overall economy functions and interacts
number of vendors and there is no restriction globally.
against additional vendors entering the
market. Example:
 Monopoly – a business condition which as 1. Economic Growth: Measuring a
unique product or service is available from country's GDP and analyzing its
only one supplier. growth over time.
 Oligopoly – a condition in which there are so 2. Unemployment Rates: The
few suppliers of a product or service that percentage of unemployed individuals
action by one will almost result in similar in a country and factors contributing
action by the others. to it.
 Law of Supply and Demand – If the supply of 3. Monetary Policy: Central banks
goods or service outstrips the demand for it, adjusting interest rates to control
Prices will fall. If demand exceeds supply, inflation.
Prices will rise.
 Purchasing Power – the value of a currency
expressed in terms of the number if goods or
services that one unit of money can buy.
COST CONCEPTS

Cost concepts in engineering economics refer

to the classification, measurement, and analysis of
6. Sunk Cost - Costs that have already been
costs associated with engineering projects or
incurred and cannot be recovered, regardless
decisions. Understanding these costs is essential for
of future actions.
evaluating alternatives, determining project
feasibility, and making informed decisions. Example: Money spent on research and
development or a failed prototype.

1. Fixed Cost – the cost that remains constant

regardless of the level of production. 7. Opportunity Cost - The value of the next best
Examples: Rent for a factory, salaries of alternative foregone when making a decision.
permanent staff, or depreciation of
machinery. Example: If a company invests $1 million in a
solar energy project instead of a wind energy
project, the forgone profit from the wind
2. Variable Cost – Cost that vary directly with project is the opportunity cost.
the level of production or activity.
Example: Raw material costs, electricity
usage, and labor wages for production
workers. 8. Incremental Costs - The additional cost
associated with a particular decision or
change.
3. Total Cost – the sum of fixed and variable
cost. Example: The cost of adding an extra
production shift or upgrading machinery.
Total Cost (TC) = Fixed Cost (FC) +
Variable Cost (VC)

9. Direct and Indirect Costs

- Direct Costs: Costs that can be directly
4. Marginal Cost – the additional cost incurred
traced to a specific project or product
for producing one more unit.
(e.g., raw materials, labor).
Formula:
Marginal Cost (MC) = Δ Quantity / Δ
- Indirect Costs: Costs that are not directly
Total Cost.
attributable to a specific project or
product (e.g., administrative expenses,
Example: If producing 1,000 units costs
utility bills).
$15,000 and 1,001 units costs $15,005, the
marginal cost is:
10. Life Cycle Costs - The total cost of owning and
MC= (15005 – 15000)/1 = 5 operating an asset over its entire lifespan,
including acquisition, operation, maintenance,
5. Average Cost – The cost per unit of output. It and disposal costs.
includes average fixed cost and average
variable cost. Example: Evaluating the total cost of a
machine from purchase to disposal.
Formula: AC = Total Cost / Quantity

Example: if producing 1000 units costs

$15000, the average costs is;

AC = 15000/1000 = 15 per unit.