Advances in Chinese Economic Studies series
Shuji Yao, Zhongwei Han and Dan Luo
EFFICIENCY CONCEPTS Definitions of Efficiency Efficiency is usually defined as ‘maximising a desired outcome with given resources’. The standard economic definition of productivity is stated as ‘the ratio of weighted sum of outputs to weighted sum of inputs’. It becomes a relative efficiency measure if the ratio is restricted to be less than or equal to one. Relative efficiency implies a comparison of productivity among a number of organisations in the same production process. The higher the ratio, the more efficient the unit is. In a group, value one is assigned to the most efficient units. Others are called inefficient. The term ‘efficiency’ can be defined in different ways, such as Pareto efficiency, technical efficiency, allocative efficiency, revenue efficiency, X-efficiency, exchange efficiency and market efficiency. Different terms may have different meanings, but most definitions point to the same problem: how can inputs be used most effectively to produce outputs? 4.1.2 Technical Efficiency and Scale Efficiency Technical efficiency seeks to measure how well inputs are converted into outputs during a specific production process. Figure 4.1 illustrates the concept of technical efficiency in a one input and two outputs case (Cooper, Seiford and Tone, 1999). The production possibility set is the region bounded by the axes and the frontier line BCE. Points B, C and E are efficient because they are on the production boundary. Points A and D are inefficient units. The efficiency of A is evaluated by [d(OA)) /(d(OB)] where d (OA) denotes the distance from A...
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