Productive Efficiency
Productive Efficiency refers to a situation where an organization is producing at the lowest possible cost. It is achieved when the organization uses the optimal combination of inputs (e.g., labor, capital, and materials) to produce a given output. In other words, productive efficiency occurs when an organization produces the maximum output possible given the number of inputs used in the production process.
The formula for productive efficiency is as follows:
Productive Efficiency = Actual Output / Potential Output
For example, let's say that a factory produces 1,000 widgets in a day using 10 workers, 2 machines, and 100 pounds of raw materials. The factory has the capacity to produce 1,500 widgets per day with the same amount of inputs. In this case, the productive efficiency of the factory would be:
Productive Efficiency = 1,000 / 1,500 = 0.67 or 67%
This means that the factory uses only 67% of its potential output, given the amount of inputs used in the production process. There is room for improvement in the productive efficiency of the factory.
By improving their productive efficiency, organizations can reduce their production costs and increase their profit margins. This can be achieved by implementing new technologies, improving production processes, or increasing the skills of their workforce.