Production Efficiency

What Is Production Efficiency?

Production efficiency is an economic term describing a level at which an economy or entity can no longer produce additional amounts of a good without lowering the production level of another product. This happens when production is reportedly occurring along a production possibility frontier (PPF).

Production efficiency may also be referred to as productive efficiency. Productive efficiency similarly means that an entity is operating at maximum capacity.

Understanding Production Efficiency

In economics, the concept of production efficiency centers around the charting of a production possibility frontier. Economists and operational analysts will typically also consider some other financial factors, such as capacity utilization and cost-return efficiency when studying economic operational efficiency.

In general, economic production efficiency refers to a level of maximum capacity in which all resources are being fully utilized to generate the most cost-efficient product possible. At maximum production efficiency, an entity cannot produce any additional units without drastically altering its production process. The company will seek to gain added capacity capabilities through lowering the production of another product.

The Federal Reserve provides a monthly report on industrial production and capacity utilization, which can be helpful in understanding production efficiency for the manufacturing, mining, electric, and gas utilities sectors. Analysis of production efficiency also involves a close look at costs. Generally, economic production efficiency simultaneously suggests that products within scope are being created at their lowest average total cost. From this perspective, economies of scale and cost-return efficiency measures are also analyzed.

Overall, maximum production efficiency can be difficult to attain. As such, economies and many individual entities aim to find a good balance between the use of resources, the rate of production, and the quality of the goods being produced without necessarily maxing out production at full capacity. Operational managers must keep in mind that when maximum production efficiency has been reached, it is not possible to produce more goods without drastically altering portfolio production.

Production Possibility Frontier

The production possibility frontier is central to the economic concept of production efficiency. Theoretically, variables are charted along the x- and y-axis showing maximum production levels that can be achieved through simultaneous production. Maximum economic production efficiency, therefore, includes all of the points along the production possibility frontier curve.

The PPF curve shows the maximum production level for each good. If an economy or entity cannot make more of a good without lowering the production of another good, then a maximum level of production has been reached.

Measuring Efficiency

In addition to operating based on a PPF, analysis of production efficiency can also take other forms. Analysts can measure efficiency by dividing output over a standard output rate and multiplying by 100 to get a percentage. This calculation can be used to analyze the efficiency of a single employee, groups of employees, or sections of an economy at large.

The formula looks like this: 

Efficiency = Output Rate ÷ Standard Output Rate × 1 0 0 \text{Efficiency}=\text{Output Rate}\div\text{Standard Output Rate}\times100 Efficiency=Output Rate÷Standard Output Rate×100

The standard output rate is a rate of maximum performance or the maximum volume of work produced per unit of time using a standard method. When maximum production efficiency is achieved for any sample under analysis then production efficiency will be at 100%. If an economy is producing efficiently, then it will have a production efficiency of 100%.

Productivity vs. Efficiency

Productivity serves as a measurement of output, normally expressed as some units per amount of time, such as 100 units per hour. Efficiency in production most often relates to the costs per unit of production rather than just the number of units produced. Productivity vs. efficiency can also involve analysis of economies of scale. Entities seek to optimize production levels to achieve efficient economies of scale which helps to lower per-unit costs and increase per-unit returns.

Production Efficiency and the Service Industry

The concepts of production efficiency typically apply to manufacturing but can also be used within 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 with an optimized level of quality output.