RELATIVE
RESOURCE
EFFECIENCY
N A C H O R , WA G A N
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OBJECTIVES
o Identify the basic ways to improve resource efficiency
o Understand how output changes relative to resource inputs
o Identify the reasons for return scale
o Identify how to overcome decreasing and negative returns
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ECONOMIC EFFICIENCY
Implies an economic state in which every resource is allocated to serve
each individual or entity in the best way while minimizing waste and
inefficiency.
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Technical efficiency
the effectiveness with which a given set of inputs
is used to produce more outputs.
Technical efficiency rate
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RELATED CONCEPTS
Productive efficiency Allocative efficiency
X-inefficiency
The concept of technical Technical efficiency is
It is said to occur when a
efficiency is related to necessary for allocative
firm fails to be
productive efficiency. It efficiency to be achieved.
technically efficient
is concerned with However, allocative
because of an absence of
producing at the lowest efficiency also requires the
competitive pressures.
point on the short run optimal allocation of
average cost curve. resources.
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Basic Ways to Improve Resource Efficiency
How much a plant overall efficiency can be improved to
increase output depends on the amount of wasted resources
and time that could otherwise could be used productively.
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Change the nature of resource through innovation
Change the external condition of resources
More balanced resource combination
Using resource saving technology
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RETURN SCALE
Return scale measures the change
in output relative to resource inputs in the long run and
indicate how overall resource efficiency changes.
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INCREASING RETURNS
TO SCALE
occurs when the output
increases by a larger
proportion than the
increase in inputs
during the production
process.
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DECREASING RETURNS
TO SCALE
Occurs when the
proportion of output is
less than the desired
increased input during
the production process
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CONSTANT RETURN TO SCALE
constant returns to scale means that the proportionate
increase in input is exactly equal to the increase in
output.
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RETURN TO SCALE
R = RETURN TO SCALE
Hunter
Q = OUTPUT
Ranger Wizard
I = RESORCE INPUT
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RETURN TO SCALE
RETURN TO SCALE RETURNS MARGINAL AVERAGE
R= %(ΔQ) / %(ΔI) PRODUCTIVITY PRODUCTIVITY
Greater than 1 Increasing Increases Increase
Equal to 1 Constant Constant Constant
Less than 1 Decreasing Decreases Decreases
Less than Zero or Decreasing and Negative Negative Decreases
Negative
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When increasing returns to scale occurs, it results in
economies of scale. This is owing to the fact that efficiency
increases when organizations progress from small-scale to
large-scale production. A loss of efficiency in the production
process, even when the production has been expanded, results
in decreasing returns to scale. This may occur if the
organization becomes too large to be operated as one single
entity. In this case, there is no economy of scale.
RETURN SCALE
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REASONS FOR RETURNS TO SCALE
The early part of plant expansion conditions
resource specialization and division of labor
Hunter
which increase returns to scale.
Ranger Wizard
This stage is characterized by the efficiency
of size or economies of scale.
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SMALL PLANT
- a resource may be assigned different functions
LARGE-SCALE PRODUCTION
Hunter Ranger Wizard
- enable resources to concentrate on job requirements instead of
diffusing efficiency
Diseconomies of scale- decreasing efficiency of size
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Overcoming Decreasing and Negative Returns
• Advances in information technology can solve the once
insurmountable problems of communication and control
in large organizations.
Hunter Ranger Wizard
• The fast processing and transmittal, as well as the
efficient storage of large volume of complex information
make technology an indispensable tool of management
decision-making.
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The more efficient you are at doing the wrong thing,
the wronger you become. It is much better to do the
right thing wronger than the wrong thing righter. If
you do the right thing wrong and correct it, you get
better.
-Russell L. Ackoff
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REFERENCES
https://www.economicshelp.org/blog/glossary/technical-efficiency/
https://www.investopedia.com/terms/e/economic_efficiency.asp
https://smallbusiness.chron.com/concept-marginal-productivity-10570.html
https://bizfluent.com/info-8463028-difference-between-average-marginal-productivity.html
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