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Main Dictionary E

Efficiency

Term efficiency implies an indicator that is determined by the ratio of the highest economic result at the lowest costs that gave rise to this result (effect). This means that all of the goods used for production are utilized in the most efficient way in order to lessen the unneeded spendings and improve the materials or forces discharge.

Efficiency types 

There are multiple ways of efficiency boost. Some of them are:

  • cost reduction;
  • changes in business activities;
  • risk minimization;
  • obtaining additional values for development.

Cost reduction refers to optimizing the timing of business tasks, costs of labor, resources and materials.

Changes in business activities can be done through speeding up some processes or swapping their execution mode. 

Additional values for development examples might be expansion of employees, enlargement of information space and automatization.

There are few efficiency types that can simply be calculated with the help of the formula: efficiency= output/input.

Efficiency can be categorized and has few classes:

  • economic;
  • market;
  • operational.

Economic efficiency refers to rationally getting the maximum benefits possible from the available resources maintaining a balance between economic benefits and costs. The aim of economic efficiency is to achieve the highest efficiency of costs and goods usage.

Market efficiency represents the information’s influence on the share prices and the whole trade market. This hypothesis was formulated by the American economist Eugene Fama. There are several critical considerations against the efficient market hypothesis, for example, Theory of Financial Bubbles and The Volatility Paradox.

Operational efficiency of a company measures the achievement of the best ratio between the involved resources and the work results. A company that functions in an operational way performs the same tasks faster avoiding errors and reducing costs. It also facilitates reduction of transaction costs and fees.

There is also another classification of the efficiency classes:

  • allocative;
  • peak;
  • energy efficiency.

Allocative efficiency describes a market with equal distribution of goods and services between economic agents such as households, companies, state and others for achieving the best result possible. Allocative efficiency provides entities with a better decision-making process and faster economic growth. Capital is distributed in the best way possible for benefit each party involved.

Peak efficiency is the highest efficiency level. It represents the best usage of workforce, capital and resources when they share the greatest imaginable performance by fully utilizing their abilities. Peak efficiency reflects the top stage of the economy. It usually happens in developed countries and is relevant to high quality of life.

Energy efficiency. This efficiency class occurs when the result is achieved with help of lower energy usage. Nowadays, it is crucial to care about the environment as well as reduction of production costs. The rational energy utilization leads to decreased volume of produced exhaust fumes, lessens the greenhouse emission and helps to drop energy needs of manufacturers. There are multiple options for beneficial energy consumption. For example, usually newer equipment and machinery uses less energy than their predecessors.

The importance of Efficiency

The aim of economic efficiency is to reach the wisest resource management with a purpose for society's needs satisfaction. Such needs as material, social, spiritual are related to the human needs. In the interest of doing so, the economy has to be productive in all of the fields of public life. They are the production, social sphere that includes education, culture and health care, and in the public administration. The efficiency of each of these spheres is determined by the ratio of the results obtained to the costs and is measured by a set of quantitative indicators.

Efficiency indicators

Production efficiency is estimated quantitatively and can be characterized by some of the economic efficiency principles. These efficiency principles cover efficiency production determination using all the types of the resources, manufacture efficiency measurement correctly and to stimulate resources utilization with maximal efficiency.

Taking into account stated above, defines the following system of production efficiency indicators:

  • common rate;
  • personnel efficiency indicator;
  • index of production funds efficiency;
  • indicator of financial funds efficiency usage.

Common rate. These efficiency indicators describe unit profit, unit expenses and the general profitability of an enterprise. 

Personnel efficiency indicator. The workforce efficiency rate reflects the growth of labor productivity, labor intensivity, and the working time utilization index.

Index of production funds efficiency shows whether funds are operated effectively, funds profitability, and fixed assets turnover ratio.

Indicator of financial funds efficiency usage narrates turnover and profitability of the assets, capital investments and payback period of capital investments.

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