The presentation covers concept of Engineering Efficiency, Technical Efficiency and Economic Efficency

1. Unit‐1
Introduction to Engineering
Economics and Managerial
Economics
8/31/2016 1NHU 501 Dr N R Kidwai, JIT Barabanki

2. Concept of Efficiency
• In general business decision making, and policies three
different types of efficiency concepts are encountered.
– Engineering efficiency
– Technical Efficiency
– Economic efficiency.
8/31/2016 2NHU 501 Dr N R Kidwai, JIT Barabanki

3. Engineering Efficiency:
• physical amount of some single key input used in production
and is measured by the ratio of that input to output.
Engineering efficiency (%) = (Output/Key Input) x 100
• Engineering efficiency does not take financial considerations.it
is purely about physical relationships.
Ex. engineering efficiency of an engine: Let a steam engine is
40 percent efficient means that 40 percent of the energy in
the fuel is converted into work done, while the other 60
percent is lost in friction, heat loss, and other unavoidable
sources of waste
Ref: http://wps.prenhall.com/wps/media/objects/1308/1340291/ragan_econ_11ce_Ch08_topic.pdf
8/31/2016 3NHU 501 Dr N R Kidwai, JIT Barabanki

4. Technical Efficiency:
• is related to physical amount of all resources used in producing a
product.
Technical efficiency (%) = (Output produced / All Input resources ) x 100
• Thus technical efficiency is about getting the most output from
any given set of inputs; or, equivalently, about producing a given
level of output using the least amount of physical inputs.
Ex. Technical efficiency of a diesel engine Technical efficiency (%) = (Heat equivalent of
mechanical energy produced/ Heat equivalent of fuel used ) x 100
EX., Let a firm is using 100 units of labour and 50 units of capital to produce a level of
output. If the firm could maintain its output level by using only 90 units of labour
without using more capital, then it is being technically inefficient in current methods
as it is “wasting” 10 labour units
Ref: http://wps.prenhall.com/wps/media/objects/1308/1340291/ragan_econ_11ce_Ch08_topic.pdf
8/31/2016 4NHU 501 Dr N R Kidwai, JIT Barabanki

5. Economic Efficiency
• is related to the value or cost (rather than the physical
amounts) of all inputs used in producing a given output.
Economic efficiency (%) = (Output/ Input) x 100 = (Worth/ Cost) × 100
• The production of a given output is economically efficient if
there are no other ways of producing the output that use a
smaller total value of inputs.
• Ex. a firm have three alternative production methods. First require a lot of labour
but only a little capital, Second requires a lot of capital and only a little labour,
while third production method may require a lot of land but relatively little of both
labour and capital. In order to be economically efficient (maximize its profits) the
firm should choose the production method that costs the least.
• Economic efficiency is also called ‘productivity’
Ref: http://wps.prenhall.com/wps/media/objects/1308/1340291/ragan_econ_11ce_Ch08_topic.pdf
8/31/2016 5NHU 501 Dr N R Kidwai, JIT Barabanki

6. Relationship among various efficiencies
• Engineering efficiency aims to maximizes the output with
respect to key input (Engineering efficiency may increase the cost i.e
reduce the economic efficiency)
• Technical Efficiency aims to maximize the output with least
quantities of resources (A high end technological process may be
technically efficient but may significantly increase fixed cost and cost of
skilled labor and may not be economic efficient)
• Economic efficiency is maximizing the profit in shortest time
(bottom-line is the only yardstick)
(In the context a product or service need only be complete enough to satisfy
the customer, especially if it makes it possible to sell the same product
repeatedly, or sell a newer, more complete version of the product later. A
business that sells a product which completely satisfies its customers
indefinitely will put itself out of business; Thus, a business may have a strong
disincentive to produce design which are efficient in the engineering sense.)
Ref: http://wps.prenhall.com/wps/media/objects/1308/1340291/ragan_econ_11ce_Ch08_topic.pdf
8/31/2016 6NHU 501 Dr N R Kidwai, JIT Barabanki

7. Relationship among different
efficiencies
• Technical efficiency is desirable as long as long as inputs have
a positive cost to the firm for being economically efficient.
Thus achieving technical efficiency is clearly a necessary
condition for producing any output at the least cost. But
achieving technical efficiency, however, is not a sufficient
condition for producing at the lowest possible cost.
Ex., the engineering efficiency of a gas turbine engine can be increased by using more
and stronger steel in its construction. Raising the engineering efficiency of an engine
saves on fuel, but at the cost of using more of other inputs. To know whether this is
worth doing, the firm must compare the value of the fuel saved with the value of the
other inputs used.
A Automobile which is strongly technically efficient (a longer life) may affect the repeat
sale/sale of newer versions and may not be economically efficient to the company.
Ref: http://wps.prenhall.com/wps/media/objects/1308/1340291/ragan_econ_11ce_Ch08_topic.pdf
8/31/2016 7NHU 501 Dr N R Kidwai, JIT Barabanki

8. Ways to increase Economics Efficiency
(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.
Ref: http://www.rajahir.co.in/Downloads/Engineering%20Economics%20Book_Paneerselvam.pdf
8/31/2016 8NHU 501 Dr N R Kidwai, JIT Barabanki