Concept of Engineering Economics, Types of Efficiency, Principles of Engineering Economics and Engineering Economics analysis procedure
CONCEPT OF ENGINEERING ECONOMICS
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.
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.
The different types of efficiency and their impact on the operation of businesses and the definition and scope of engineering economics are going to be discussed in the following section.
Types of 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.
The technical efficiency of a diesel engine is as follows:
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.
‘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
• 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.
Principles of Engineering Economics
Develop the alternatives: Decisions are made from the alternatives. The alternatives need to be identified and then defined for the subsequent analysis.
Focus on the differences: Only the differences in expected future outcomes among the alternatives are relevant and should be considered for decision.
Use a constant view point: The expected outcomes of the alternatives, economic and other, should be consistently developed from a defined view.
Use of common unit of measure: Common unit of measurement to measure as many of the expected outcomes will make the analysis and comparison of alternatives easier.
Consider all relevant criteria: Selection of a preferred alternative requires the use of criteria.
Make uncertainty explicit: Uncertainty is a basic in projecting the future outcomes of the alternatives and it should be recognized in their analysis and comparison.
Revisit your decisions: The selected alternatives should be subsequently compared with actual results achieved.
Engineering economics analysis procedure
1. Problem recognition, formulation and evaluation.
2. Development of suitable alternatives.
3. Development of the cash flows for each alternative.
4. Selection of criterion.
5. Analysis and comparison of the alternatives.
6. Selection of the preferred alternative.
7. Performance monitoring and post evaluation results.
