ENGINEERING
ECONOMIC
Bhesh R Kanel, Coordinator
College of Biomedical engineering And Applied sciences
June, 2014
Essential Economics Terminologies
Utility

Utility is a measure of power of good or service to
satisfy human wants
Value
 Measure of worth a person ascribes to a good or services.
It is an utility to a person in terms of money.
 Value is inherent in what someone wants to pay for it
and differ from cost
Cost

Expenditure incurred in producing a product or
service.
Essential Economics Terminology
Price:
 Quantity of Resources (amount) a seller is
ready to exchange for goods or services.
Note
Value:
Cost:
Price:
buyers perspective,
producers perspective
value agreed upon between a buyer and a seller
Value > or = Price> or = Cost
Essential Economics Terminology
Market or Market Place
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A place where exchanges of goods and services take place
Physical Market (Fixed locations e.g. shop or group of shops
Virtual Market: online market
Fair Market Value
A price at which buyers and sellers with a reasonable knowledge of
pertinent facts and not acting under any compulsion are willing to
do business ...
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Distress Value
Price Set betn buyer and seller on compulsion
Essential Economics Terminology

Capital
Financial Resources (Land, Building, equipment,
money etc.) deployed in an enterprise to produce
goods and services

Equity
Capital deployed in the form of ownership of an
enterprise

Debt
Borrowed capital deployed in the enterprise
Essential Economics Terminology
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Liability
An enterprise’s legal debts or obligations
that arise during the course of business
operations.
Assets
An economic resource of entity (including
money resources, physical resources, and
intangible resources)
Essential Economics Terminology
Interest
The charge for the privilege of borrowing money,
typically expressed as an annual percentage rate.
Annuity
A series of equal payments/receipts occurring at equal
periods of time
Amount paid annually/monthly/semi-annually etc,
including reimbursement of borrowed capital and
payment of interest
Essential Economics Terminology

Cash flow
The actual rupees coming into enterprise and going out of it.
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Breakeven point
A graphical representation of relation between total income
and total costs for various levels of production and sales
indicating areas of profit and loss.
A point where the organization is in no gain and no loss
state.
Sell
Cash
Profit
Cost
Loss
Break Even Point
Production
Fig: Break Even Analysis
Essential Economics Terminology

Simple interest
The interest charges under the condition that interest in any time
period is charged only on the principal.

Compound interest
The type of interest that is periodically added to the amount
investment (or loan) so that subsequent interest is based on the
cumulative amount

Time value of money
Money has the ability to earn interest, its value increases with time.
Hence it is the relationship between interest and time.
Essential Economics Terminology
Decision making
A program of action undertaken as a result of
established policy to influence the final
decision
Decision making under certainty
Simple decisions that assume complete
information and no uncertainty connected
with the analysis of the decisions
Essential Economics Terminology

Decisions under uncertainty
A decision for which the analyst elects to
consider
several
possible
futures,
the
probabilities of which cannot be estimated.

Discount rate
The rate used to calculate the present
value of the future cash flows. It is
inverse of compounding
Essential Economics Terminology

Inflation
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Decrease in the purchasing power of money
an increase in the average price paid for goods and
services bringing about reduction in the purchasing
power.
Determined as CPI (for citizens) and PPI (for Industry)
The converse of inflation is deflation.
Deflation
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Increase in purchasing power or decrease in price
We can pay less money to buy same quantity of good
than before
Essential Economics Terminology
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Depreciation
Decline in value of a capitalized asset.
Economic life
The timeframe an asset will be economically useful.
The period of time that results in the minimum
equivalent uniform annual cost of owning and operating
an asset
It is also called minimum cost life or optimum
replacement interval
Essential Economics Terminology
Ownership life
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Period between date of acquisition and date of
disposal by a specific owner
Physical life

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Period between original date of acquisition
and final disposal
Useful life

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Time period in years that assets is used in
productive services
Essential Economics Terminology

Economic efficiency
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Ratio of output to input of a business system
Economic efficiency (%) = Output/Input*100 = Worth/ cost
*100
Intangibles
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conditions or economy factors that cannot be readily evaluated
in quantitative terms as in money.
In accounting, the assets that cannot be reliably evaluated (e.g.,
goodwill, social values).
Labour

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the capacity of human effort (both mind and muscles) available
for use in producing goods and services.

Opportunity cost

The value of benefits sacrificed in selecting a course of action among
alternatives.
 The value of the next best opportunity foregone by deciding to do one thing
rather than another.

Marginal cost

It is the derivative (additional) cost that is result from increasing the rate of
output by only single unit
 Economists name “Derivative” as “Marginal”: dV, dP, or dQ
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Salvage value
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It is the value(cost/revenue) of equipments at project termination
Sunk cost
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cost that has been already incurred by past action
 It is irrelevant to decision making as all cost is spend
Other Terminologies
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Share
Profit
Amortization
Earnings before Tax (EBT)
Earnings per Share
Return on Investment (ROI)
Return on Assets (ROA)
Internal Rate of Return (IRR)
Working Capital
Cost of Capital
Risk Premium
EBITDA or Earnings Before
Interest, Taxes, Depreciation
and Amortization.
Financial Statements:
Balance Sheets (three parts to a
balance sheet:
• Assets
• Liabilities
• Equity
Income Statement (Profit/Loss
Account) over a period FY or
quarterly
'Financial Statements'
Records that outline the financial activities of a
business, an individual or any other entity.
Financial statements are meant to present the
financial information of the entity in question as
clearly and concisely as possible for both the
entity and for readers. Financial statements for
businesses usually include: income statements,
balance sheet, statements of retained earnings
and cash flows, as well as other possible
statements.
Profit Loss Account (Income Statement)

A financial statement that measures a company's
financial performance over a specific accounting period.
Financial performance is assessed by giving a summary
of how the business incurs its revenues and expenses
through both operating and non-operating activities. It
also shows the net profit or loss incurred over a specific
accounting period, typically over a fiscal quarter or year.
Also known as the "profit and loss statement" or
"statement of revenue and expense."