Productivity = Output / Input

Efficiency = Doing things right

Effectiveness = Doing the right things

See: http://smallbusiness.chron.com/productivity-versus-efficiency-66229.html

Productivity = Output / Input

Efficiency = Doing things right

Effectiveness = Doing the right things

Two firms similar to A would produce 12 units of output employing as inputs: 10 units of raw material, 4 units of labour, and 6 units of capital. If the cost of two units of raw materials ("saved" comparatively to firm B) is higher than the cost of 2 units of labour and 3 of capital (used in excess comparatively to firm B), technology A minimizes the average cost of production, otherwise not (irrespective of its raw material saving characteristic). That is all. 

Thank you Prof. Salanti: So how would you differentiate between efficiency and productivity? The firm which has lower average cost of production is more efficient or more productive?

Well, we can define marginal productivity (if the production function is continue and differentiable as dO/dI) and average productivity in any case (quantity of output/quantity of input) with reference to any single input. (Economic) efficiency is measured in terms of costs. Your example highlights the possibility that economic efficiency differs from some measure of technical efficiency. This is not a so uncommon situation.

Thank you. Prof Salanti: May I draw your attention to the following question I asked earlier. https://www.researchgate.net/post/What_is_the_interpretation_if_marginal_product_of_a_sector_is_lower_than_that_of_another_but_its_Average_Productivity_is_greater

I am keen to know your view on the above.

productivity and efficiency are terms that are used with a variety of definitions.

Productivity is as Andrea Salanti points out is output level divided by the input or production factor level to attain the output. This is often used as technical efficiency as well, e.g. energy efficiency is production divided by the energy needed to produce it.

Allocative efficiency on the other hand looks at the whole picture. Often this equates to the value of production divided by the costs of production.

Note that if the objective is not pure profit, allocative efficiency will have to be defined in an alternative way.

The observation by Gideon on the objective being possibly different from pure profit is surely correct. To this we should add that when we consider the value of production we have to use prices. If not all makets involved are perfectly competitive (which is usually the case) the related prices are not all equally "efficient", so that in that way we might introduce serious distortions.

Productivity means how much outputs will generate with reference to inputs in production function. efficiency somehow related to production capacity.

Chetna: Please elaborate

Ideal combination of all the inputs like capital, labor, technology ... which generate highest satisfaction output reflect in indifference curve , ultimately reach to high efficiency.

In my opinion, efficiency is maximizing output giving your limited resources (limited cost of production, it can also goes the other way around, minimizing the cost of a giving output.

Productivity, in a sense is more, of comparing outputs in absolute, so efficiency is a deeper definition of a productive firm. In your example, Firm B is more productive, (10 units is larger than 6 units), however, they could be nearly similarly efficient, as firm A is using less resources ( lower cost of production). In this frame, productivity and effectiveness are similar

Productivity (or more accurately total factor productivity) is determined by efficiency (some firms using inputs to produce output but with below best practice current technology) and technical change (an improvement in technology for the industry to a new best practice). To determine TFP requires knowledge of the functional form of the production function (how important in elasticity terms is each factor of production when producing output), so it its not just the accounting exercise you set out. That said, in your example, firm 2 is likely more efficient as produces 66% more output with only a 100% increase in one factor input. But if intermediates are a large part of total production needs (and hence costs) then firm 2 might be less efficient!

In Managerial terms I would like to propose  a  distinction:

"Productivity" is a concept belongig to the technical aspects of the process you are examining while "efficiency"  aspects are to  be examined within the competitive ones!

I try to explain better the concept:

If you have a technical aspect that you can describe in e.g. pieces /hour or in similar terms, you have a quantitative , dimensional , reference that is performance related  to your sector of activity, factory and or department. The figures that you generate, in absolute terms, are then describing your "technical ability" in that moment  or period of time, referring to the specific activity or production that you are doing. or examining. You are talking therefore in this case of productivity  !

Efficiency aspects in the other hand are related to a relative comparison and you can translate them also in terms of costs comparison.

You are efficient comparing to : competition, previous process, previous machine and your productivity figure cannot be examined only in absolute terms but particularly comparing the data to someone else or something else.

In general, in managerial terms,  we like to  talk of efficiency of costs, when , in comparison to others, it arises a competitive advantage. E.g.: In a meeeting report you read that efficiency is increasing, or productivity is increasing.

The two concepts may concide but not always this is true.

If your increase in productivity gives you a competitive advantage or benefit,  costwise, Ok , but if your increase in productivity does not generate a comparative and competitive  advantage per unit, you cannot consider  "managerially thinking" that your efficiency is increased even if the productivity is greater then before.

I remember a personal story: in the early '90s  I was appointed General Manager of a Company producing waterproofing membranes and selling these products  almost  in all the world.

The technological story of the Company was then quite impressive but, at the end of the '80s,  a decline started to affect the costs competitivity and the Economic results achieved. When I asked to the Technical Director to outline something specific about the efficiency of costs, he made me a splendid presentation on a five years history of technology development and of increase of productivity. Every year the process development reached a 5% increase of production line speed. Therefore, he claimed that the productivity growth was OK, and the cost  per length and  per roll unit was decreasing.

My comment was : What about comparative "efficiency" comparing  to Competitors?

I conclude this personal  story telling you that  the Company recovered the proper "efficiency" only after having almost doubled the production lines speed and productivity, but it took almosto two years of efforts, investments and a new Technical Director, to reach a satisfactory  and  new competitive efficiency on the Production costs!

Kind regards

Alberto 

Efficience means rather heading for maximazation of outcomes, while productivity is more associated with labor, capital and so on. Not all units which are efficient are productive at a time.

Dr. Lechman: Could you give an example?

There are three important terms in Economics that efficiency, sustainability, impact assessment. Efficiency of any plant can be measured by productivity ie. labor productivity, production productivity, total factor productivity  ect. thus efficiency gives the idea about input output relationship in short

Production: Produce.

Productivity: Produce more.

Efficiency: Produce more with less input.

Productivity refers to the conversion level of inputs into outputs. A process that can produce more output using less inputs is more proactive.

Efficiency in the economic sense mean that things should be done in an economic way considering that resources are scarce. Efficiency therefore implies doing the right things in a rightful manner. No third party is made worse off.

Not exactly conventional, or apologetic thinking, but I like the way Andy Kessler puts it...an excerpt from a page in his compelling book  (link#). Efficiency and effectiveness is subsumed under productivity. And no coincidence why economists are more concerned with the "P" in GDP than effectiveness (E1) and efficient (E2)- "P" is a sufficient condition for success, where as the other two Es are either necessary or prerequisites to it.

https://books.google.com.my/books?id=mQzezSKJKEwC&pg=PT63&lpg=PT63&dq=Eat+people+Andy+Kessler+Productivity+efficiency&source=bl&ots=AxgT7Pn85s&sig=ePJaygbzju1E2zGE5Zp-t0nPH5k&hl=en&sa=X&ei=7939VMD7JaelmQXeyIGIBg&ved=0CD8Q6AEwBg#v=onepage&q=Eat%20people%20Andy%20Kessler%20Productivity%20efficiency&f=false

Productivity is the capacity to produce. Productivity is the relation between the results and time spend it. A factory that produces tons of some product, has a height productivity rate.

Efficiency is the way of doing things very well. The factory can be very productive ¡, but not efficient. Then, if the factory increment the efficiency, increment the rate of productivity. A common mistake consists in confuse productivity with efficiency. Efficiency means produce goods of height quality in less time as possible is. Another side, productivity is linked with product quality, of the incomes earned and the process.

The improvement of productivity not only consist making thing very well; is more important make things correctly.

to achieve  the productivity we must  have the efficiency at first .

that means  product a highest   number of units with  less number of  productions elements. then we accomplish the (products efficiency) principle . 

As business professionals, we take some important business concepts for granted. Today, we’ll explore the difference between Productivity and Efficiency, which are often confused with each other and see if I can offer a perspective that I hope will add some clarity or, at the very least, add some value to the conversation and debate. What you don’t want are metrics just for metrics sake – or, even worse, dog poop for metrics. Even more, don’t succumb to analysis paralysis.

Not unlike the Weighted Moving Average calculation and how it can help us understand trends in a time series, productivity and efficiency can help us understand our operation.

Consider the following:

Productivity Example

Quantity $/Unit

Car X 4000 $8,000

Car Y 6000 $9,500

Labor Hours for X 20,000 $12/Hour

Labor Hours for Y 30,000 $14/Hour

Worker Productivity

Part of managing processes is to measure their performance.

This article will discuss 2 basic process measures: Productivity and Efficiency.

For instance,

Simply, productivity is measured like this:

Productivity = Outputs / Inputs

What is the labor productivity in Hours for each car type?

Car X: (4,000 cars / 20,000 Hours) = 0.2 Cars / Hour

Car Y: (6,000 cars / 30,000 Hours) = 0.2 Cars / Hour

How about in labor Productivity in Dollars?

Car X: [(4,000 * $8,000) / (20,000 * $12)] = $133.33 / Car

Car Y: [(6,000 * $9,500) / (30,000 * $14)] = $135.71 / Car

So, based on the data set above, it appears that Productivity by Hours, both Car X and Car Y are the same; but, Productivity by Dollars, Car X is cheaper to make given the labor hours and hourly rate.

How is this practical? Below is a direct citation from the Harbour Report, 1998:

Labor hours needed for stamping, power train, and assembly operations:

Harbour Report

(100% Nissan 27.6 hours

(168%) GM 46.5 hours

(126%) Ford 34.7 hours

If GM could operate at Nissan’s level of productivity, they’d save themselves about $4.4 Billion Per Year. Measured another way, GM has about 55,000 more workers than it needs.

Worker Efficiency

Efficiency is measured with the following equation:

Efficiency = [100% * (actual output / standard output)]

Standard Output in the equation above is a number that is arrived at by looking at historical data for the job and by experience. One would hope that that number is not an arbitrary one, but a number that is derived by looking at a historical time series.

Here’s an example:

Shmula’s Bodywork does automotive collision work. An insurance agency, using actuarial data, has determined that the standard time to replace a fender is 2.5 hours (ie, “standard output” = 0.4 fenders per hour), and is willing to pay Shmula $50 per hour for labor (parts and supplies are billed separately). Shmula pays its workers $35 per hour.

Suppose Shmula’s workers take 4 hours to replace a fender. What is Shmula’s labor hour efficiency? Given Shmula’s labor costs, will Shmula make money on the job?

Using the equation and the data above, we get:

(1 fender / 4 hours) / (1 fender / 2.5 hours) = .625 * 100% = 62.5% efficiency

2.5 hours * $50 = $125 paid by insurance

4 hours * $35 = $140 costs

Shmula will lose $15 per fender.

Economic Profits are important to Shmula; Given the answer above, how efficient does Shmula need to be to break even?

[($125) / ($35/hour)] = 3.57 hours to Break Even

We know that, Efficiency = 100% * (actual output / standard output). So,

(1 fender / 3.57 hours) / (1 fender / 2.5 hours) = .7003 * 100% = 70.03% efficiency. Shmula will need to improve efficiency to 70% or better to make money.

Often times, I hear people use the phrases “productivity” and “efficiency” carelessly, not completely understanding what they mean. These terms have technical definitions and are very practical for business. Still, given the explanation above, one must excercise good judgement in detemining which processes ought to be measured by Productivity and Efficiency and balance these measures with other items that might be important to the individual, firm, and industry. Some measures might make sense for some activities, but not others.

Productivity includes both efficiency as well as technical change( shift of the frontier).

Niharika,

Sharing some perspectives from these papers

https://www.researchgate.net/publication/299747565_Towards_a_talent-driven_outward-oriented_globally-competitive_SME_framework_Discussion_Paper

https://www.researchgate.net/publication/299604127_Human_Factors_Affecting_Productivity_in_Jamaica_Technical_Report_on_Preliminary_Findings

https://www.researchgate.net/publication/305687139_Priority_policy_recommendations_for_transforming_individual_productivity_and_SME_competitiveness_in_Jamaica

Technical Report Towards a talent-driven outward-oriented globally-competitiv...

Technical Report Priority policy recommendations for transforming individual ...

Technical Report Human Factors Affecting Productivity in Jamaica: Technical R...

 Technical efficiency is productivity  (Sen, 1987, On ethics and economics).

chutia

Thanks

Niharika,

In general, Productivity is a measure of the production efficiency of an operation or enterprise; which thus captures the relationship between efficiency and productivity

Productivity traditionally has three dimensions:

a) labour productivity (LP) - measures the amount of goods and services produced by one hour of labour

b) capital productivity (CP) - measures the amount of goods and services produced by one unit of capital

c) total factor productivity (TFP) or multi-factor productivity (MFP) - TFP/MFP is calculated by dividing output by the weighted average of labor and capital input, with the standard weighting of 0.7 for labor and 0.3 for capital

TFP however, suffers from the critique that the unit of measurements are not easily comparable, which of course is the dilema you are facing. How do I compare the relative contribution of a unit of raw material with a unit of capital with a unit of labour ?.

The interpretations also suffer from the problem of levels: productivity measures at the firm level are not necessarily the measures used at the sector and country levels. That used in the services sector may not be applicable to the manufacturing and the farm sectors.

There is a expansive list of productivity formulas, at the firm level, from the Asian Productivity Organisation in the article below

Presentation Quantifying the Productivity Gains from Investing in Innovat...

Productivity is simply Output/Input. Thus individual productivity of all 8 input Ms (Men, Machine, Materiel, Money, Method, Management, Marketing and Mother Nature) van be individually calculated.

While, efficiency is doing things right. Mathematically this implies:

Efficiency = (Total Output - Rejection)/Input