Basic Economic Principles

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Questions and Answers

What is economics?

Economics is the discipline concerned with the economic aspect of engineering and one of the social sciences which consists of that body of knowledge dealing with people and their assets or resources. It is the sum total of knowledge which treats of the certain and utilization of goods and services for the satisfaction of human wants.

What is engineering economy?

Engineering Economy is a branch of economics which involves the application of definite laws of economics, theories of investment and business practices to engineering problems involving cost. It is the study of economic problems with the concept of obtaining the maximum profit at the least cost and involves the study of cost features and other financial data and their applications in the field of engineering as bases for decision.

Which of the following is NOT an important application of engineering economy?

Seeking of new objectives for the applications of engineering.
Discovery of factors limiting the success of venture or enterprises.
Analysis of possible investment of capital
Ignoring alternatives as a basis for decision. (correct)

Define consumer goods and services.

Consumer goods and services are those products or services that are directly used by people to satisfy their wants. Examples are food, clothing, homes, cars, haircuts and medical services. Signup and view all the answers

Define the 'Price of goods and services'.

Price of goods and services is defined to be the present amount of money or its equivalent which is given in exchange for it. Signup and view all the answers

What is demand?

Demand is the quantity of a certain commodity that is bought at a certain price at a given place and time. Signup and view all the answers

What is supply?

Supply is the quantity of a certain commodity that is offered for sale at a given place and time. Signup and view all the answers

Perfect competition occurs in a situation in which any given product is supplied by a small number of vendors.

False (B) Signup and view all the answers

A perfect monopoly exists when multiple suppliers offer a unique product or service and prevent others from entering the market.

False (B) Signup and view all the answers

Define 'oligopoly'.

Oligopoly occurs when there are few suppliers and any action of one will affect the others. Signup and view all the answers

What are fixed costs?

Fixed costs are those unaffected by changes in activity level over a feasible range of operations for the capacity or capability available. Examples are insurance and taxes on facilities, general management and administrative salaries, license fees, and interest costs on borrowed capital. Signup and view all the answers

What are variable costs?

Variable costs are those associated with operations that vary in total with the quantity of output or other measures of activity level. Examples are the costs of material labor used in the product or service. Signup and view all the answers

What is incremental cost?

Incremental cost is the additional cost (or revenue) that results from increasing the output of the system by one or more units. Signup and view all the answers

What are recurring costs?

Recurring costs are those that are repetitive and occur when an organization produces similar goods or services on a continuing basis. Signup and view all the answers

What are indirect costs?

Indirect costs are those that are difficult to attribute or allocate to a specific output or work activity. Signup and view all the answers

What are overhead costs?

Overhead costs consist of plant operating costs that are not direct labor or direct material costs. Examples are electricity and taxes. Signup and view all the answers

What are standard costs?

Standard costs are representative costs per unit of output that are established in advance of actual production or service delivery. Signup and view all the answers

What are non-cash costs?

Non-cash cost are costs that does not involve a cash payments, but rather than represent the recovery of past expenditures over a fixed period of time. Example is the depreciation charged. Signup and view all the answers

What is sunk cost?

Sunk cost is one that has occurred in the past and has no relevance to estimates of future costs and revenues related to an alternative course of action. Signup and view all the answers

What is opportunity cost?

Opportunity cost is incurred because of the use of the limited resources such that the opportunity to use those resources to monetary advantage in an alternative use is foregone. Signup and view all the answers

What is life-cycle cost?

Life-cycle cost refers to summation of all the costs, both recurring and nonrecurring, related to product, structure system, or services during its life span. Signup and view all the answers

What is investment cost?

Investment cost is the capital required for most activities in the acquisition phase. Signup and view all the answers

What is working capital?

Working capital refers to the funds required foe current assets that are needed for the start up and support of operational activities. Signup and view all the answers

What are operational and maintenance costs?

Operational and maintenance cost includes many of the recurring in the annual expense items associated with the operation phase of the life cycle. Signup and view all the answers

What is disposal cost?

Disposal cost includes those nonrecurring costs of shutting down the operation and the retirement and disposal of assets at the end of the life cycle. These costs will offset in some instances by receipts from the sale of assets with remaining value. Signup and view all the answers

What is physical life?

Physical life is the period between original acquisition and final disposal of an asset over the succession of owners. Signup and view all the answers

What is ownership life?

Ownership life is the period between the date of acquisition and the date of disposal by a specific owner. Signup and view all the answers

What is useful life?

Useful life is the time period that an asset is kept in productive service (either primary or back up). It is an estimate of how long an asset is expected to be used in trade or business to produce income. Signup and view all the answers

What are tangible factors?

Tangible Factors are those which can be expressed in terms of monetary values. Signup and view all the answers

Define Competition in economics.

Competition occurs when a certain product is offered for sale by many vendors or suppliers, and there is no restriction against other vendors from entering the market. Signup and view all the answers

Define Monopoly in economics.

Monopoly occurs when there are few suppliers and any action taken anyone of them will definitely affect the course of action of the others. Signup and view all the answers

Define 'Price' in the context of economics.

Price defined to be the amount of money or its equivalent which is given in exchange for a good or commodity. Signup and view all the answers

If prices go up, production will decrease.

False (B) Signup and view all the answers

What happens to goods in great demand and are scarce?

Goods in great demand and are scarce command a high price relative to cost of production and therefore will yield a high profit. Signup and view all the answers

What happens to goods that have little demand?

Goods that have little demand command a low price in relation to the cost of production. Signup and view all the answers

What is a market?

Market is defined to be a place where sellers and buyers come together. Signup and view all the answers

What is a local market?

Local market a limited locality where certain goods such as those which are perishable are sold. Signup and view all the answers

Define consumer goods.

Consumer goods are those that are consumed or used directly by people, or are things and services which serve to satisfy human needs (i.e., clothes, shoes, food, houses, medical and dental services, barber and beauty services). Signup and view all the answers

Define 'Demand'.

Demand is the quantity of a certain commodity that is bought at a certain price at a given place and time. Signup and view all the answers

State the Law of Demand.

The demand for a commodity varies inversely as the price of the commodity, though not proportionately. Signup and view all the answers

What is elastic demand?

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, because a small decrease in cost will usually result in a big increase in sales. Signup and view all the answers

What is unitary elasticity of demand?

Unitary elasticity of demand occurs when the mathematical product of price and volume of sales remains constant regardless of any change in price. $PV = C$, Where, $P$ = price of the product, $V$ = volume of sales, and $C$ = a constant. Signup and view all the answers

What is the Law of Diminishing Utility?

An increase in the quantity of any good consumed or acquired by an individual will decrease the amount of satisfaction derived from that good. Signup and view all the answers

What is marginal utility?

Marginal utility is the utility of the last unit of the same commodity which is consumed or acquired Signup and view all the answers

Define 'Supply'.

Supply is the quantity of a certain commodity that is offered for sale at a certain price at a given place and time. Signup and view all the answers

State the Law of Supply.

The supply of a commodity varies directly as the price of the commodity, though not proportionately. Signup and view all the answers

State the Law of Supply and Demand.

When free competition exists, the price of a product will be that value where supply is equal to the demand. Signup and view all the answers

State the Law of Diminishing Returns.

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 input. Signup and view all the answers

What is Marginal Revenue?

Marginal Revenue – the amount received from the sale of an additional unit of a product. Signup and view all the answers

What is Marginal Cost?

Marginal Cost - additional cost of producing one more unit. Signup and view all the answers

Define Efficiency.

Efficiency $= \frac{Output}{Input}$ Signup and view all the answers

Define Physical Efficiency.

Physical Efficiency $= \frac{Output \space in \space Physical \space Units}{Input \space in \space Physical \space Units}$ Signup and view all the answers

Define Economic Efficiency.

Economic Efficiency $= \frac{Income \space in \space Pesos}{Cost \space in \space Pesos}$ Signup and view all the answers

Define Rate of Return.

Rate of Return $= \frac{Annual \space Net \space Profit}{Capital \space Invested}$ Signup and view all the answers

Define Payout Period.

Payout Period $= \frac{Capital \space Invested}{Net \space Annual \space Cash \space Flow}$ Signup and view all the answers

What does Present Economy involve?

Present Economy involves the analysis of the problems for manufacturing products of rendering a service based on present or immediate cost. Signup and view all the answers

Flashcards

Economics

The discipline concerned with the economic aspect of engineering; dealing with people, assets and resources.

Engineering Economy

Branch of economics applying economic laws, theories, and business practices to engineering problems involving cost.