Concept Of Technical And Economic Efficiency


Do you know what technical efficiency is and how it affects the company? The term ” efficiency ” refers to a concept widely used within the business world. Efficiency is one of the bases and pillars on which the operations of any company are based, and the company’s performance depends to a great extent on it. It can be technical, or it can also be talked about economic efficiency, and we will deal with both in the following lines.

What Is Technical Efficiency?

Technical efficiency refers to all those programs that arise from the combination of the different production processes of the company and that determine its operations. Therefore, if we talk about improving the technical efficiency of a company, we are talking about enhancing production processes and, with it, the company’s global operations.

When Does Technical Efficiency Happen?

In a strict sense, improving technical efficiency means that the company can create more output without consuming more of any of the inputs. In other words, the company can produce the same thing while consuming less than at least one input. Therefore, energy efficiency should not be confused with another type of efficiency, for example, if the company produces the same thing while consuming fewer resources, it would no longer speak of technical efficiency, since to speak of an improvement in technical efficiency the output of the company must be increased.

A Key Quirk Of Technical Efficiency

On the other hand, it should be noted that the term “technical efficiency” refers to a continuous process that always moves forward, does not go back. In other words, the moment a company modifies or introduces a new process that improves its technical efficiency, the old processes will be obsolete forever. That is, they will never be more efficient than the new processes being implemented.

How To Measure Technical Efficiency?

Technical inefficiency is calculated by the difference between the production levels of each company and the maximum level that is reached in the FPP (Production Possibilities Frontier). Therefore, it can be considered a percentage of the most efficient production unit within a sample.

Technical Efficiency Calculation Example

Technical efficiency rate = (actual output for given inputs / maximum potential output for given inputs) x 100

Suppose a company produces 500,000 shoes a week from its current workforce and the machinery available. If the maximum potential product were 610,000, the technical efficiency rate of this company would be (500/610) = 81.96%. This percentage alerts that something is wrong since more could be produced.

Technical efficiency is defined as the ability to produce the maximum possible yield from a particular set of inputs and a specific technology or produce a particular product level from the minimum amount of information in a particular technology. If some workers are underemployed and the inputs are, a percentage of potential production is lost.

What Is Economic Efficiency?

Economic efficiency refers to a financial situation with an optimal allocation or distribution of resources with minimal waste and less inefficiency.

Some terms such as allocation efficiency, production efficiency, and Pareto efficiency report on the different stages of economic efficiency. This economic term is more of a theoretical concept. To determine whether the economy is efficient in its operations, economists consider focusing on waste, the amount of loss that falls between the actual scenario and pure efficiency.

Economics relates economic efficiency to the scarcity of resources. Therefore, the economy does not have adequate resources to report whether the economy is performing at its best at all times. There must be an optimal distribution of these scarce resources to meet economic needs effectively. However, there must also be little or no waste of resources.

How To Promote Technical Efficiency And Economic Efficiency In The Company?

The technical and economic efficiency can be increased from the improvement, development and evolution of the different agents and processes involved in producing output, that is, the product or service that is the object of the company’s activity. For example, ways to improve technical efficiency can be:

  • The training of professionals.
  • The adoption of global management systems.
  • The implementation of Big Data tools.
  • The commitment to new technologies that help improve and simplify processes.

All this is always aimed at producing more, improving technical efficiency, profitability, and profits.

For its part, economic efficiency goes hand in hand with technical efficiency, choosing those processes that, determined by the technical efficiency of the company, are likely to generate more profits and, therefore, should be a priority.

The objective of any company is to improve technical efficiency to the maximum so that it can produce the most significant amount of output possible using the least number of resources. How to achieve this is precisely the “crux” of the matter. To find out, it will be necessary to carry out an analysis of the company and analyze the economic impact obtained.

Also Read: What Are The Benefits Of Business Intelligence For Companies?

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