Production Efficiency

Loading the player...

What is 'Production Efficiency'

Production efficiency is an economic level at which the economy can no longer produce additional amounts of a good without lowering the production level of another product. This happens when an economy is operating along its production possibility frontier. Efficient production is achieved when a product is created at its lowest average total cost; production efficiency measures whether the economy is producing as much as possible without wasting precious resources.

BREAKING DOWN 'Production Efficiency'

Theoretically, production efficiency includes all of the points along the production possibility frontier, but this is difficult to measure in practice. If the economy cannot make more of a good without sacrificing the production of another, then a maximum level of production has been reached.

Production efficiency is based on a business’ ability to produce the highest number of units of a good while using the least amount of resources possible. The aim is to find a balance between the use of resources, rate of production and quality of the goods being produced. When production efficiency has been reached, it is not possible to produce more goods without using excess resources or sacrificing product quality.

Productivity vs. Efficiency

Productivity serves as a measurement of output, normally expressed as a number of units per an amount of time, such as 100 units per hour. Efficiency relates to how well a goal is accomplished, normally by considering the amount of resources used, and waste created, in comparison to goods produced.

Evaluating Production Efficiency

To evaluate production efficiency, each phase of production must be examined. The primary focus is on maintaining acceptable quality standards while reducing waste in both materials and production times without harming another portion of the process. This is seen as a long-term process, as changing conditions may impact current methods resulting in the need for reevaluation.

True Production Efficiency

True production efficiency is only reached when it is not possible to improve performance in one area without doing harm to another. At that point, the business is seen as functioning at peak efficiency within the current system.

Production Efficiency and the Service Industry

The concepts of production efficiency can also apply to the service industry. To perform a service, resources are required, such as the use of human capital and time, even if no other supplies are required. In these cases, efficiency can be measured by the ability to complete a particular task or goal in the shortest amount of time while minimizing waste and maintaining quality.

RELATED TERMS
  1. Economic Efficiency

    A broad term that implies an economic state in which every resource ...
  2. Efficiency

    A level of performance that describes a process that uses the ...
  3. Productivity And Costs

    An economic data set that measures future inflationary trends ...
  4. Pareto Efficiency

    An economic state where resources are allocated in the most efficient ...
  5. Equity-Efficiency Tradeoff

    An economic situation in which there is a perceived tradeoff ...
  6. Marginal Rate Of Transformation

    The rate at which one good must be sacrificed in order to produce ...
Related Articles
  1. Markets

    Understanding Production Efficiency

    Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production of another product.
  2. Markets

    Explaining Economic Efficiency

    Economic efficiency is achieved when every resource is optimally allocated to minimize waste and best serve each person in that economy.
  3. Markets

    Explaining Efficiency

    Efficiency refers to the ability to make something with the fewest resources possible.
  4. Trading

    Market Efficiency Basics

    Market efficiency theory states that a stock’s price will fully reflect all available and relevant information at any given time.
  5. Markets

    Understanding Marginal Cost of Production

    Marginal cost of production is an economics term that refers to the change in production costs resulting from producing one more unit.
  6. Investing

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  7. Financial Advisor

    How to Create a New Financial Product in 10 Steps

    The 10 steps outlined here are essential to the creation of a new financial product.
  8. Entrepreneurship & Small Business

    Explaining Minimum Efficient Scale

    Minimum efficient scale is the smallest amount of production a firm can achieve while still taking full advantage of economies of scale.
  9. Markets

    The Production Possibility Frontier (PPF)

    A production possibility frontier (PPF) is a range of answers to the question, “What is our maximum production capacity?”
  10. Markets

    What's Behind the Decline in Productivity Numbers? 

    There are several theories and hypotheses about low productivity numbers in the American economy. This article examines some of them.
RELATED FAQS
  1. How do I calculate the production possibility frontier in Excel?

    Learn how to create production possibility frontier curves in Microsoft Excel and understand the importance of production ... Read Answer >>
  2. Can you calculate more than two inputs with the production possibility frontier?

    Understand how production possibility frontiers are used in business and learn more about how additional products may be ... Read Answer >>
  3. Is there any way to reverse the law of diminishing marginal returns?

    Learn more about how consumer spending, supply and demand impact production decisions. Find out more about the law of diminishing ... Read Answer >>
  4. How have portfolios from within the efficient frontier performed historically?

    Explore how the efficient frontier is used in selecting investment portfolios. Find out how risks and returns are used to ... Read Answer >>
  5. How is an economy formed and why does it grow?

    Find out how an economy forms and why it grows, including the role that financial markets play and how productivity increases ... Read Answer >>
  6. Do production costs include the marginal cost of production?

    Learn more about marginal costs of production and production costs. Find out how businesses can use marginal cost calculations ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center