Engineering Economics

• Money serves as a medium of exchange, store of value, and unit of account
• Medium of Exchange:

  • Means of payment for goods or services
  • What sellers accept and buyers pay
• Store of Value:

  • Delays buying power from one time period to another
• Unit of Account:

  • Precise measurement of value or worth
  • Allows for tabulating debits and credits
• Brief history of money:

  • Coins introduced in Lydia in 561 BC
  • Chinese issued paper currency in 800 AD leading to inflation
  • Goldsmiths used notes as evidence of payment in Europe during the 1600s
  • Gold Standard established in the 1900s
• The Gold Standard:

  • Basic currency unit is equal to and exchanged for a specific amount of gold
  • Advantages: security, prevents government from printing paper money
  • Disadvantages: gold stock does not grow fast, price of gold likely to change
• Capital:

  • Wealth in the form of money or property used to produce more wealth
• Kinds of Capital:

  • Equity Capital: owned by individuals who invest in business projects for profit
  • Debt Capital: obtained from lenders for investment
• Interest:

  • Fee paid by a borrower to a lender for the use of money
• Simple Interest:

  • Total interest earned or charged is linearly proportional to the principal, interest rate, and number of interest periods
  • Formula: I = (P)(i)(N)
  • Future Amount: F = P + I = P + P(i)(N) = P(1 + iN)
• Types of Simple Interest:

  1. Ordinary Simple Interest: computed based on one banker's year (360 days)

  2. Exact Simple Interest: based on the exact number of days (365 days for ordinary year, 366 days for leap year)