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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'

Production efficiency is based on a business’s 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, the 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.

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 good without sacrificing the production of another, then a maximum level of production has been reached.

Measuring Efficiency

To measure efficiency, you need to divide an employee’s output rate by the standard output rate, then multiply that figure by 100 percent. The formula looks like this: 

                                             Efficiency = Employee’s output rate ÷ Standard output rate x 100 percent

The standard output rate is the employee’s normal performance rate or the volume of work she can produce per unit of time using a particular method and with the typical kinds of skills. Things like operational strategy, technology, process and the employee’s skills and effort can influence the rate of output. 

Productivity vs. Efficiency

Productivity serves as a measurement of output, normally expressed as some 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 number 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 harming 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.

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