Business, Legal & Accounting Glossary

Definition: Efficiency

Full Definition of Efficiency

Economic efficiency refers to a situation where no further improvement can be made to existing production, without adversely affecting other entities. In such a scenario, an increase in output is impossible without increasing the quantity of inputs. Also, when economic efficiency is achieved, production per-unit cost is at its minimum value. These three factors taken together actually point to a situation where a maximum level of efficiency has been achieved given the resources.

An entire economic system can be termed as efficient if excess goods and services can be produced without utilizing extra resources. A market economy is considered to be more efficient than any of the other kinds of economy. This belief owes its origin to first fundamental welfare theorem where it’s stated that a perfectly competitive market equilibrium has to be efficient, given that no market imperfections exist. Microeconomic reforms are used to increase economic efficiency. Some experts suggest that economic efficiency may not be good for public policy.

Economic System

An economic system is built by a group or groups of entities that deal in production, distribution and consumption of goods and services. An economic system usually comprises persons and institutions. Capitalist, socialist and mixed economy are some examples of an economic system.

First Fundamental Welfare Theorem

Out of the two fundamental welfare theorems, the first one is related to efficiency. According to the first fundamental welfare theorem, competitive equilibrium, also known as Walrasian equilibrium, results in the efficient allocation of resources.

Microeconomic Reforms

Microeconomic reforms simply referred to as economic reforms, are implemented to achieve better economic efficiency. This can be done by eliminating discrepancies in individual economic sectors and also by introducing economic policies like tax policy and competition policy.

Cite Term

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Page URL
Modern Language Association (MLA):
Efficiency. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. September 16, 2021 https://payrollheaven.com/define/efficiency/.
Chicago Manual of Style (CMS):
Efficiency. PayrollHeaven.com. Payroll & Accounting Heaven Ltd. https://payrollheaven.com/define/efficiency/ (accessed: September 16, 2021).
American Psychological Association (APA):
Efficiency. PayrollHeaven.com. Retrieved September 16, 2021, from PayrollHeaven.com website: https://payrollheaven.com/define/efficiency/

Definition Sources

Definitions for Efficiency are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 29th March, 2020 | 1 Views.