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 understanding production efficiencyin 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 by lowering the production of another product the federal reserve provides a monthly report on industrial production and capacity utilization which can help understand production efficiency for the manufacturing mining electric and gas utilities sectors 1 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 frontierthe 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 excel and other similar software make charting the curve easier 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 pff curves aren t always two dimensional as we ll discuss in the next section consider how companies can have dozens if not hundreds of products to manufacture example of pff curveimagine a company faced with the decision to produce either guns or butter the ppf represents the maximum output combinations of two goods that can be produced given fixed resources and technology in this scenario the company can produce 100 guns 100 units of butter or any combination along the ppf where resources are allocated efficiently see the graph below for the graphical example initially if the company produces 100 guns it utilizes all available resources for gun production maximizing output in this sector conversely if it produces 100 units of butter resources are allocated solely to butter production these points on the ppf illustrate the efficient use of resources dedicated entirely to either guns or butter however the company can also produce points such as 80 guns and 60 units of butter this allocation shows a trade off between guns and butter production to achieve this combination resources are shifted from gun production to butter production demonstrating the opportunity cost of producing fewer guns to produce more butter as long a the company manufactures along the pff line any combination of goods is considered efficient this fictitious and somewhat silly example is helpful to understand how more complex intricate companies must decide between trade offs consider international firms like apple which must allocate resources between iphones macbooks software development virtual reality or accessories like airpods measuring efficiencyin 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 efficiencyproductivity is a measure of output relative to input it s typically expressed as a ratio of what is produced goods or services to the resources used in production labor hours materials or capital for example if a factory produces 100 units per hour of labor its productivity would be 100 units hour efficiency on the other hand is about how well resources are used in the production process it s concerned with minimizing waste and maximizing the output for a given set of inputs efficiency takes into account not just the quantity of output but also the quality and the optimal use of resources for example if a factory can utilize the same resources as above but produce 110 units per hour it is capitalizing on efficiency a process can be productive without being efficient the most successful operations strive to be both productive and efficient especially as a company scales for instance when a start up comes to market its proof of concept is based entirely on its ability to produce its goods as the company grows or encounters capital constraints this is when the company s efficiency comes into play production efficiency and economies of scaleeconomies of scale refer to the cost advantages that businesses obtain due to their scale of operation with cost per unit of output generally decreasing as the scale increases this concept is closely tied to production efficiency as it directly impacts how effectively a company can produce goods or services as a firm grows and production increases it can benefit from economies of scale it can try bulk purchasing raw materials at discounted rates spreading fixed costs over a larger number of units produced and the ability to use more specialized and efficient machinery larger operations can also benefit from learning effects where workers become more skilled and efficient over time the relationship between economies of scale and production efficiency is not always linear though while increasing scale often leads to greater efficiency up to a certain point there may come a time when diseconomies of scale set in this means when the operation becomes so large that coordination problems bureaucratic inefficiencies or other factors begin to increase costs per unit production efficiency and market competitionmarket competition is a powerful driver of production efficiency competition creates constant pressure on firms to outperform their rivals in a competitive market companies that fail to maintain or improve their efficiency risk losing market share to more efficient competitors or in extreme cases being forced out of the market entirely as goods become too expensive or unprofitable to manufacture one of the primary ways competition drives efficiency improvements is through innovation companies in competitive markets are motivated to invest in research and development seeking new technologies processes or organizational structures that can give them a competitive edge consider how tesla re designed its assembly line and according to assembly magazine was able to reduce ev production costs by 50 2competition also encourages companies to optimize their resource allocation firms are compelled to critically examine their production processes identifying and eliminating wasteful practices reducing unnecessary costs and maximizing the utilization of their assets for instance think about starbucks and its drive for waste reduction by moving towards reusable personal cups starbucks is able to reduce its cost per drink as no disposable cup lid or straw would be needed 3