CHAPTER 1

THE ECONOMIC ENVIRONMENT

Engineering economy is the analysis and evaluation of the factors that will affect the economic success of
engineering projects to the end that a recommendation can be made which will insure the best use of capital.

Consumer and Producer Goods and Services

Consumer goods and services are those products or services that are directly used by people to satisfy their
wants.
Producer goods and services are used to produce consumer goods and services or other producer goods.

Necessities and Luxuries

Necessities are those products or services that are required to support human life and activities that will be
purchased in somewhat the same quantity even thought the price varies considerably.
Luxuries are those products or services that are desired by humans and will be purchased if money is available
after the required necessities have been obtained.

Demand

Demand is the quantity of a certain commodity that is bought at a certain price at a given place and time.
Elastic demand occurs when a decrease in selling price result in a greater than proportionate increase in sales.
Inelastic demand occurs when a decrease in the selling price produces a less than proportionate increase in
sales.
Unitary elasticity of demand occurs when the mathematical product of volume and price is constant.

Competition, Monopoly and Oligopoly

Perfect competition occurs in a situation where a commodity or service is supplied by a number of vendors and
there is nothing to prevent additional vendors entering the market.

Monopoly is the opposite of perfect competition. A perfect monopoly exists when a unique product or services
is available from a single vendor and that vendor can prevent the entry of all others into the market.

Oligopoly exists when there are so few suppliers of a product or service that action by one will almost
inevitably result in similar action by others.
The Law of Supply and Demand

Supply is the quantity of a certain commodity that is offered for sale at a certain price at a given place and
time.
The law of supply and demand may be stated as follows:

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

The Law of Diminishing Returns

“When the use of one of the factors of production is limited either in increasing cost or by absolute quantity, a
point will be reached beyond which an increase in the variable factors will result in a less than proportionate
increase in output.”