What Is Efficiency?

Efficiency signifies a level of performance that describes using the least amount of input to achieve the highest amount of output. Efficiency requires reducing the number of unnecessary resources used to produce a given output including personal time and energy. It is a measurable concept that can be determined using the ratio of useful output to total input. It minimizes the waste of resources such as physical materials, energy, and time while accomplishing the desired output.



Economic Efficiency

Economic efficiency refers to the optimization of resources to best serve each person in that economic state. No set threshold determines the effectiveness of an economy, but indicators of economic efficiency include goods brought to market at the lowest possible cost and labor that provides the greatest possible output.

Market efficiency describes how accurately stock prices reflect all available information. Similarly, operational efficiency occurs when stock prices accurately reflect the costs of company operations.

Key Takeaways

  • Efficiency is fundamentally reducing the amount of wasted resources that are used to produce a given number of goods or services (output).
  • Economic efficiency is the optimization of resources to best serve an economy.
  • Market efficiency is the accuracy with which stock prices reflect all of the available market information.
  • Operational efficiency is the case when stock prices reflect the cost of company operations.

Historical Techniques

Breakthroughs in economic efficiency have often coincided with the invention of new tools that complement labor. Early examples include the wheel and the horse collar. A horse collar redistributes the weight on a horse's back so that the animal can carry large loads without being overburdened. Steam engines and motor vehicles that emerged during the Industrial Revolution allowed people to move farther in less time and contributed to efficiencies in travel and trade. The Industrial Revolution also introduced new sources of power such as fossil fuels, which were cheaper, more effective, and more versatile.

Movements such as the Industrial Revolution also brought efficiencies in time. For example, the factory system, in which each participant focuses on one task in the factory line, allowed operations to increase output while saving time. Many scientists also developed practices to optimize specific task performance. A famous example in popular culture of the quest for efficiency is the biographical novel "Cheaper by the Dozen" by Frank Bunker Gilbreth, Jr. and Ernestine Gilbreth Carey. In the book, Gilbreth Jr. develops systems to maximize efficiency in even the most mundane tasks, such as brushing your teeth.

The Impacts of Efficiency

An efficient society is better able to serve its citizens and function competitively. Goods produced efficiently are sold at a lower price. Advances as a result of efficiency have facilitated higher standards of living such as supplying homes with electricity, running water, and giving people the ability to travel. Efficiency reduces hunger and malnutrition because goods are transported farther and quicker. Also, advances in efficiency allow greater productivity in a shorter amount of time. 

Efficiency is an important attribute because all inputs are scarce. Time, money and raw materials are limited, and it is important to conserve them while maintaining an acceptable level of output.

Real World Example

Industry 4.0 is the Fourth Industrial Revolution characterized by digitalization. Factory processes, manufacturing, and service industries have all become more efficient with the advent of powerful computers, cloud computing, the Industrial Internet of Things (IIoT), data analytics, robotics, artificial intelligence, and machine learning.

For example, data analytics can be applied in an industrial setting to inform factory or plant managers when machinery will need maintenance or replacement. This type of predictive maintenance can substantially reduce operational costs. Research from Accenture cited by Jay Lee, Chao Jin, Zongchang Liu and Hossein Davari Ardakani in their paper "Introduction to Data-Driven Methodologies for Prognostics and Health Management," shows that using data analytics for predicted maintenance leads to a 30% drop in costs and 70% less equipment downtime. Data logging shows system usage in real time and, using the historical data built up over time managers can identify and fix inefficient systems.