What Is Efficiency?
Efficiency refers to the peak level of performance that uses the least amount of inputs to achieve the highest amount of output. Efficiency requires reducing the number of unnecessary resources used to produce a given output, including personal time and energy.
Efficiency is a measurable concept that can be determined using the ratio of useful output to total input. Increased efficiency minimizes the waste of resources such as physical materials, energy, and time while accomplishing the desired output.
Key Highlights
- Efficiency occurs when you reduce waste to produce a given number of goods or services.
- You can measure efficiency by dividing total output by total input.
- Types include economic efficiency, market efficiency, and operational efficiency.
- Efficiency is an important attribute because all inputs are scarce.
- Measure investment efficiency using the return on investment (ROI) metric.
Understanding Efficiency
Efficiency can be defined as the ability to achieve an end goal with little to no waste, effort, or energy. Being efficient means achieving your results by optimizing the use of resources like money, human capital, production equipment, and energy sources.
Analyzing efficiency can help reduce costs and increase bottom lines. For example:
- Corporations can measure production process efficiencies to cut costs and increase output for higher sales and revenue.
- Consumers can purchase energy-efficient appliances to cut down their energy bills while reducing greenhouse gases.
- Investors can gauge investment efficiency using the return on investment (ROI) metric, indicating an investment’s return relative to its cost.
Efficiency can be measured and expressed as a ratio or percentage using the formula:
Efficiency = Output ÷ Input
If you want to express efficiency as a percentage, simply multiply the ratio by 100.
Types of Efficiency
Economic Efficiency
Economic efficiency refers to the optimization of resources to best serve each person’s needs in an economic state. Indicators of economic efficiency include goods brought to market at the lowest possible cost and labor maximizing output.
Market Efficiency
Market efficiency describes how well prices integrate available information. Efficient markets incorporate all information into prices, implying no way to beat the market since there are no undervalued or overvalued securities.
Operational Efficiency
Operational efficiency measures how well profits are earned as a function of operating costs. Greater operational efficiency indicates the entity’s ability to generate higher income or returns for the same or lower cost than alternatives.
A Historical Look
Breakthroughs in economic efficiency often coincide with the invention of new tools that complemented labor, such as:
- The horse collar, which redistributed weight on a horse’s back, enabling it to carry larger loads.
- Steam engines and motor vehicles from the Industrial Revolution, which facilitated travel and trade efficiencies.
- Cheaper and more effective sources of power like fossil fuels.
Efficiencies in time also emerged, like the factory system where each participant focuses on one task, leading to increased output and time savings.
The Impacts of Efficiency
Efficiency is crucial due to the scarcity of inputs like time, money, and raw materials. An efficient society better serves its citizens and is more competitive. Goods produced efficiently sell at lower prices, and advances in efficiency have facilitated higher standards of living and increased productivity.
Efficiency reduces hunger and malnutrition by enabling longer and quicker transportation of goods. Advances in efficiency also allow for greater productivity in a shorter time.
Example of Efficiency
Industry 4.0, the Fourth Industrial Revolution, is characterized by digitalization. Technologies like data analytics, cloud computing, and the Industrial Internet of Things (IIoT) optimize factory processes and manufacturing for improved efficiency. Predictive maintenance is one application where data analytics can inform when machinery needs maintenance, significantly reducing operational costs.
How to Calculate Efficiency
Efficiency can be expressed as a ratio:
Efficiency = Output ÷ Input
Output (work output) is the total amount of useful work completed without accounting for waste and spoilage. You can also express efficiency as a percentage by multiplying the ratio by 100.
What Is Allocative Efficiency?
Allocative efficiency occurs in an efficient market where capital is optimally allocated to benefit each party. It allows even distribution of goods, services, and financial solutions so they are utilized in the best way possible, facilitating decision-making and economic growth.
What Is Peak Efficiency?
Peak efficiency is the highest level of efficiency. It occurs when all capital, resources, and participants are optimally allocated and functioning at their best. Peak economic efficiency, for instance, happens when the economy is productive and citizens’ living standards are high.
What Is Energy Efficiency?
Energy efficiency involves using less energy to achieve the same result. It reduces energy waste, lowers greenhouse gases, and cuts costs. Consumers can purchase energy-efficient appliances, while corporations can adopt more efficient production equipment to increase output and lower costs.
What Measures Efficiency in Investments?
An investment’s efficiency is measured by its return on investment (ROI). This metric indicates how profitably an investment performs relative to its cost. ROI can be used to compare multiple investments within the same asset class by expressing the result as a ratio or percentage.
The Bottom Line
Being efficient means achieving your goals with minimal resources and waste. Efficiency is beneficial for both businesses and individuals. Businesses reduce costs and improve profits, while consumers who make efficient choices save money and increase returns over time.
Use the efficiency formula to guide important decisions about your financial health.
Related Terms: economic efficiency, market efficiency, operational efficiency, allocative efficiency, energy efficiency.
References
- Fama, Eugene F. Efficient capital markets: A review of theory and empirical work. *The Journal of Finance,*Vol. 25, No. 2. 1970, Pp. 383-417.
- Ernestine Gilbreth Carey and Frank Bunker Gilbreth. **Cheaper by the Dozen. Bantam Books, 1996.
- Elijah, Olakunle, et al. An overview of Internet of Things (IoT) and data analytics in agriculture: Benefits and challenges. *IEEE Internet of things Journal,*Vol. 5, No .5. 2018, Pp. 3758-3773.
- Carvalho, Thyago P., et al. A systematic literature review of machine learning methods applied to predictive maintenance. *Computers & Industrial Engineering,*Vol. 137. 2019, 106024.
