Concept of Engineering Economics

Concept of Engineering Economics

ü Science is a field of study where the basic principles of different physical systems are formulated and tested.

ü Engineering is the application of science. It establishes varied application systems based on different scientific principles.

ü From the discussions in the previous section, it is clear that price has a major role in deciding the demand and supply of a product.

ü Hence, from the organization’s point of view, efficient and effective functioning of the organization would certainly help it to provide goods/services at a lower cost which in turn will enable it to fix a lower price for its goods or services.

ü The following section discusses the different types of efficiency and their impact on the operation of businesses and the definition and scope of engineering economics.

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Types of Efficiency

Efficiency of a system is generally defined as the ratio of its output to input. The efficiency can be classified into technical efficiency and economic efficiency.

1. Technical efficiency

It is the ratio of the output to input of a physical system. The physical system may be a diesel engine, a machine working in a shop floor, a furnace, etc.

Technical efficiency (%) =  Output/ Input × 100

The technical efficiency of a diesel engine is as follows:

Technical efficiency (%) =

[ Heat equivalent of mechanical energy produced / Heat equivalent of fuel used ] x 100

In practice, technical efficiency can never be more than 100%.

This is mainly due to frictional loss and incomplete combustion of fuel, which are considered to be unavoidable phenomena in the working of a diesel engine.

2. Economic efficiency

Economic efficiency is the ratio of output to input of a business system.

Economic efficiency (%) = Output/Input  × 100 = Worth/Cost × 100

‘Worth’ is the annual revenue generated by way of operating the business and ‘cost’ is the total annual expenses incurred in carrying out the business.

For the survival and growth of any business, the economic efficiency should be more than 100%.

Economic efficiency is also called ‘productivity’. There are several ways of improving productivity.

§  Increased output for the same input

§  Decreased input for the same output

§  By a proportionate increase in the output which is more than the proportionate increase in the input

§  By a proportionate decrease in the input which is more than the proportionate decrease in the output

§  Through simultaneous increase in the output with decrease in the input.