Productive Efficiency
Last Updated :
21 Aug, 2024
Blog Author :
Priya Choubey
Edited by :
Collins Enosh
Reviewed by :
Dheeraj Vaidya
Table Of Contents
What is Productive Efficiency?
The Productive efficiency of a firm or economy depends on its ability to utilize limited resources optimally and attain maximum production capacity. Thus, any further rise in production would require additional resources.
When an economy or company achieves production efficiency, wastage levels are minimal. The parameter ascertains the diligent use of limited resources—raw material, labor, capital, equipment, energy, and technology.
Table of contents
- What is Productive Efficiency?
- Productive efficiency is a point at which the economy or a business entity can produce the maximum quantity of goods. This is achieved by strategic allocation of finite resources—capital, labor, equipment, material, technology, and energy.
- Production efficiency relies on the functioning of the Production-Possibility Frontier (PPF) curve. The curve denotes the efficiency of two products that are produced by the same company using the same resources.
- For assessing a firm’s production efficiency, the following formula is used:
Production Efficiency=(Actual Output Rate)/(Standard Output Rate)×100
Productive Efficiency Explained
Productive efficiency is the minimization of production cost and maximization of output. This is achieved by optimum resource allocation. Resources are allocated in such a way that the Product is cost-efficient, and the quality is uncompromised. It is also referred to as production efficiency.
Production efficiency is a parameter that measures the operational efficiency of a firm or an economy. Resources are finite; beyond the highest production capacity, a firm cannot produce extra units of goods. The term finite resource refers to capital, equipment, material, labor, technology, and energy.
Production efficiency is derived using a production possibility frontier (PPF). This curve shows how two products can be efficiently produced through optimum utilization of the same limited resources. The different points on the curve indicate combinations of two goods or services that can be produced efficiently. Also, to increase the output of one Product, the production of the other has to be reduced.
For example, let us assume that a company produces two goods, A and B. The maximum production level of both these goods is represented by the following production-possibility frontier curve:
The graph represents Product A goods on one axis and Product B goods on the other axis. We see a sloping curve that is bowed out.
Since resources are limited, the curve represents the trade-offs associated with prioritizing one Product over the other. If you produce more Product A, you will have to produce less Product B and vice versa. Producing less of one Product to produce more of another product is referred to as the opportunity cost.
Productive efficiency can be achieved with the help of the following measures:
- Detect the loopholes in the production process.
- Eliminate those loopholes.
- Set production benchmarks and follow a standardized process to ensure consistency.
- Keep an eye on wastage in the manufacturing premises. To reduce wastage, adopt techniques like Kanban, JIT, Kaizen, and Six-Sigma.
- To boost proficiency, schedule training and learning programs for laborers and production managers.
- Ensure proper inventory management.
- Install efficient machinery to achieve the highest production level.
Formula
The productive efficiency is said to be at 100% when the limited resources are put to best use, and maximum production is realized. It is computed using the following formula:
Productive Efficiency=(Actual Output Rate)/(Standard Output Rate)×100
Further, the actual output rate is derived by the following formula:
Actual Output Rate=(Actual Output in Units)/(Time Taken to Generate Actual Output)
The standard output rate is the desired performance—benchmark. It can be ascertained from the firm’s historical data—the highest production level attained in the past.
Example
Let us assume XYZ Pvt. Ltd. is a mineral water bottling plant. The manufacturing plant owns a machine that fills 192 bottles daily. The standard bottling rate of the machine is 27 bottles per hour. If there are eight working hours in a day, determine the productive efficiency of the bottling plant.
Solution:
Given:
- Bottles filled every day = 192 bottles
- Working hours each day = 8 hours
- Standard bottling rate = 27 bottles per hour
Actual bottling rate = Bottles filled every day / Working hour each day
Actual bottling rate = 192 / 8 = 24 bottles per hour
Productive Efficiency = (Actual Output Rate) / (Standard Output Rate) × 100
Productive Efficiency = (24 / 27) × 100 = 88.89%
Thus, XYZ Pvt. Ltd. has a production efficiency of 88.89%.
Productive Efficiency vs Allocative Efficiency
Both production efficiency and allocative efficiency are essential for the smooth functioning of a firm. Despite the correlation, these are two different concepts. The distinction between production efficiency and allocative efficiency is as follows:
| Basis | Productive Efficiency | Allocative Efficiency |
|---|---|---|
| Meaning | Productive efficiency measures a firm’s ability to utilize limited resources and produce goods at 100% capacity | Allocative efficiency measures whether supply and distribution meet consumer demand and preference |
| Focus | Production process | Distribution process |
| Aim | Making the best use of resources for enhancing productivity | Improving supply and distribution |
| Opportunity Cost | The manufacturer needs to produce a smaller number of one product to produce more units of a second product | When a commodity's supply rises, its market demand falls |
| Formula | (Actual Output Rate) / (Standard Output Rate) × 100 | Marginal Benefit (Price) = Marginal Cost |
| Example | A beverage company produces a high level of coffee by utilizing 100% of its resources | A company produces 100 kgs of coffee, and the demand for coffee is also 100 kgs |
Frequently Asked Questions (FAQs)
When does productive efficiency occur?
It is experienced when a firm or an economy makes the best possible use of the combined resources to achieve the lowest possible cost. Here, combined resources refer to material, labor, capital, equipment, energy, and technology.
How to measure production efficiency?
It is determined as the actual output rate divided by the standard output rate multiplied by 100:
Productive Efficiency=(Actual Output Rate)/(Standard Output Rate)×100
What is the difference between productive efficiency and allocative efficiency?
Production efficiency is the 100% utilization of raw materials to produce goods at the minimum cost. However, allocative efficiency is the ability to fulfill consumer demand by distributing goods and services proficiently.
Can you be productive but not efficient?
A business entity can be productive and inefficient at the same time. Production is measured in quantity, whereas efficiency refers to the quality of production. High production of goods or services that compromises quality is an example of production inefficiency.
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