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Productive Efficiency Text Book
Product efficiency is a measure of the success with which a firm turns its inputs into
outputs. The more efficient a firm is the more output it generates with its inputs or the
less inputs is uses to achieve a given level of output.
The efficiency of a firm is usually measured by the cost per unit. The more efficient a
business is the lower the cost per unit; the less efficient it is the higher the cost per
By improving its productive efficiency a firm can reduce its costs per unit. This means
It can reduce the price per unit. This should lead to an increase in sales. The
extent to which sales increase depends on the price elasticity of demand. By
lowering its price the firm can offer better value for money and may achieve a
competitive advantage over its competitors.
It can maintain the same price and benefit from a higher profit per unit. This
profit can be invested into the firm or paid out to the owners.
To become more efficient in the production a firm will consider the following.
this measure the output per employee. Firms will usually try to increase the
output per employee (provided that quality is maintained). An increase in
productivity may be achieved through training, better capital equipment; better
working practices (e.g. team working) or a change in management style.
The Nature of the Production Process
Firms must consider the nature of their market and their customer requirements
and decide on the most efficient process available. This may for example be job,
batch or flow production. Flow production for example is more capital intensive
than job production but is only likely to be efficient if there are high levels of
demand for a relatively standardised product.
This is the extent to which a firm makes full use of their resources. A firm's
capacity measures the maximum output it can produce given its existing
resources. Capacity utilisation measures a firm's actual output in relation to its
capacity. The lower the capacity utilisation the less resources are being utilised
and the higher the unit cost is likely to be because resources are not being used
The Scale of Production
A firm must decide on the most appropriate scale of production. Up to some level
of output a firm may experience economies of scale; by expanding, the unit costs
may fall due to, for example, purchasing or technical economies. However, if a
firm gets too big it may suffer from diseconomies of scale, I.e. unit costs may
increase; this may be due to problems with communication, coordination and
control as the firm gets too big.
Product efficiency will therefore involve a number of factors, such as employees
productivity, the nature of the production process, the scale of production and the