Technical efficiency is to a large extent a scientific term and is directly related with the efficiency in the production process of any manufacturing organization. Technical efficiency means that the resources used for production are not wasted and that maximum production levels are attained for a given quantity of resources.
Here, resources do not refer to raw material only but also takes into consideration manpower, energy and machinery time under its purview. If a machine remains idle for a long period of time because of lack of coordination between the different departments of a manufacturing company, it is also considered to be a waste.
Productive Efficiency and Technical Efficiency
The term technical efficiency is sometimes taken in the same breath as productive efficiency. In fact the terms are somewhat interrelated too. Productive efficiency depends to some extent on the technical efficiency of a business / organization. To understand this relation one needs to understand what is production efficiency. Production efficiency is termed as the capacity of a manufacturing unit to produce items at the shortest possible cost point. To achieve this the business must have a high technical efficiency level as well.
Relationship Between Technical Efficiency and Historical Cost Analysis, Cost Control and Costing
Technical efficiency is a part of the cost control process of a manufacturing organization. The costing department uses data obtained during the production process and calculate cost of production. Needless to mention cost of production is the most important step to calculate pricing of products. Profitability of the whole business depends on the right product pricing. Historical costs are also important to predict future cost of production and with it the future profitability of a business.
Technical Efficiency and its Impact on Economic Efficiency
Technical efficiency and economic efficiency goes hand in hand. However, one does not guarantee the other. While technical efficiency is a pre-requisite to ensure that a business can strive for economic efficiency, there are a number of other factors that control the latter. Let’s say that a business sales soccer balls. It has an outsourced partner that manufactures the balls in Bangladesh which uses maximum production efficiency to manufacture them. It is the soccer season, so demand is expected to be high. The business orders a consignment of 50,000 balls to be shipped to its warehouse in the US. However, due to a problem in the labor union in Bangladesh production is delayed. The balls were shipped eventually but they arrived late for the season. By that time, much of the demand had subsided. This proves that technical efficiency alone cannot guarantee economic efficiency. A business would also require some additional efficiency in other areas as well.
Monopoly and its Effects on Technical Efficiency
Monopoly has an inversely proportional effect on technical, production and economic efficiency. When a business faces competition in the market it strives to achieve a higher technical efficiency, reduce wastage and manufacture at a cost that is lower than its rivals in the market. This is of course aimed at increasing the economic efficiency. In other words they try to achieve better profitability or in some cases strive for their very existence. When a business does not have that competition its performance becomes lackluster. It finds no motivation to increase its technical efficiency or to reduce costs. This state is also known as X-inefficiency.
Allocative efficiency refers to efficiency that is obtained when a business produces products and services that are in demand. In the above example the balls arrived late for the soccer season. By that time competitors of the business had already supplied soccer balls to the bulk of the market. This meant when the business received the consignment there was no demand for the balls. This is an example of allocative inefficiency. The best recourse for the business would have been to cancel the order and their letter of credit and then hold their supplier in Bangladesh responsible for the delay and the loss in business.
Distributive Efficiency and its Impact on Economic Efficiency
No doubt technical efficiency is an important requirement to achieve economic efficiency. But other forms of efficiency are also required in order to achieve economic efficiency. Primary among them are distributive efficiency. Distributive efficiency is a bit different than allocative efficiency and has slightly different connotation. Distributive efficiency means products and services are distributed to people who require them. Distributive efficiency connotes an equitable distribution depending on the need of the product and services among the target buyers. Distributive efficiency is largely dependent on the law of diminishing returns. Let’s say that a man is hungry and he sees a burger truck around the corner. He is likely to buy one and eat it. He may be hungry enough to order another one and eat that too. The first one would have a huge utility for the person because he is famished. The second one may have utility to but it wouldn’t be the same as the first one. If he orders a third one he may not get any utility out of it because he is already full. Conversely if the burger truck moves to another location and finds another famished individual the third burger will have a higher utility to him than the first individual.
Technology is the total summation of the knowledge that human race has accumulated over the course of history. Here some skeptics would suggest that there have been technologies which are now lost forever, the overall suggestion is to refer to the technology that has been passed down and is available at the present time. Technology not only include the know-how to manufacture products per se, but also include the general progress that human beings have achieved over the course of history in terms of their understanding of their surroundings and their ability to manipulate it to their advantage. This can easily be referred to as general aptitude or common sense.
Advancement in Technology Impacts Technical Efficiency
It is already established that advances in technology does affect technical efficiency. At every stage of human history innovation has brought about an increase in production, decrease in waste and increase in efficiency. For the same quantity of materials and the same amount of labor given, more and more products have been produced. This had a direct impact on the availability of resources and the general scarcity of necessary supplies. However, if the existing technology is being used in a manner that is inefficient then the use of the new technology might just be more expensive and give less benefit. This is an example that shows the impact of technical and social efficiency in agriculture.
Vietnam as a nation had always been a net importer of rice. It is hard to imagine now but back during the early 80’s, Vietnam’s own production of rice was less efficient which meant that it could never think of exports. However, after the Doi Moi renovation policy Vietnam steadily became a rice surplus country. So much so that even after providing for its own domestic demand of rice it started earning a handsome amount of foreign exchange by exporting rice to the rest of the world. All this improvement was brought about by the way rice was produced and by abolishment of the import quota on foreign-made fertilizers which brought about an increase in the production of rice. Additionally Vietnam’s government adopted a number of other policy changes which can be labelled as social efficiency. Social efficiency is when the resources available in a society are allocated in such a way so that they are optimally utilized. The government of Vietnam achieved this by bringing in a number of land-reform policies including land-reallocation for rice cultivation. They also abolished the rice export quota which gave a boost to the productivity.