Production efficiency is a term used to describe the state or level at which a business is producing the greatest number of units while utilizing the least amount of resources possible. The idea is to achieve a balance between use and production without decreasing the quality of the products that are manufactured. As it relates to an economy in general, production efficiency focuses on whether or not that economy is making the most prudent use of the resources available, or if making some changes would make it possible to derive more benefit from the consumption of those resources.
In a business setting, evaluating production efficiency typically involves assessing each phase of the production process. The assessment begins with the acquisition of raw materials and continues through the consumption of those materials as new products are assembled and completed. This involves obtaining the highest quality materials at the best possible prices, then keeping the amount of waste generated during the production to a minimum. This in turn makes it easier to manage the long-run average total cost associated with the production process, and keep the efficiency of the manufacturing effort as high as possible.
True production efficiency is achieved when the process can no longer produce any additional units without generating some type of loss in some other aspect of the business operation. For example, if a company produces yo-yos and boomerangs, increasing production time on the yo-yos may mean curtailing the production of boomerangs. While this may aid in producing more yo-yos and generating more returns from that activity, producing fewer boomerangs creates a loss in efficiency that the business must absorb. Assuming that both products are equally successful, the end result is that diverting resources does not enhance the company’s revenue at all, and may even have a small negative effect.
The same general concept can be found in balancing the production of different goods and services within a particular economy. If expansion in one area leads to the need to sacrifice production of goods considered equally important to the well being of that economy, the rate of production efficiency is decreased. If these activities continue and the balance between production and the consumption of resources is further undermined, the economy as a whole may suffer. Once the trend begins, it may take some time to compensate and restore the economic balance that is a central characteristic of true production efficiency.