Technical Efficiency Definition

Technical efficiency is the effectiveness with which a given set of inputs is used to produce an output. A firm is said to be technically efficient if a firm is producing the maximum output from the minimum quantity of inputs, such as labour, capital and technology.

For example, a firm would be technically inefficient if a firm employed too many workers than was necessary or used outdated capital.

The concept of technical efficiency is related to productive efficiency. Productive efficiency is concerned with producing at the lowest point on the short run average cost curve. Thus productive efficiency requires technical efficiency.

The concept of technical efficiency is also related to X-inefficiency. X-inefficiency is said to occur when a firm fails to be technically efficient because of an absence of competitive pressures. e.g. a monopoly employs inefficient working practises because it has no incentive to cut costs.

Technical efficiency is necessary for allocative efficiency to be achieved. However, allocative efficiency also requires the optimal allocation of resources


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