Economic efficiency is the study of how nations and businesses maximize the use of their economic resources or business inputs. Traditional economic resources found in the economic environment include land, labor and capital. Because nations and businesses are usually limited in these resources, they must find the most efficient way to produce the maximum amount of consumer goods without wasting resources. The inefficient use of economic resources in nations may lower the wealth of their citizens, while the inefficient use of resources can lead to companies spending too much capital producing goods or services.
Nations usually measure the efficient use of its economic resources by evaluating the livelihood or wealth of their citizens. A high quality of life or standard of living in a nation is a common indicator that a nation has maximized its economic efficiency by allowing the largest number of citizens access to economic resources. In a free market society, individuals are allowed to buy, sell or trade goods according to their own self interest. Efficiency will be achieved in the free market society when individuals cannot achieve greater wealth without decreasing the wealth of another citizen.
In addition to the economic efficiency of a nation, businesses operating in the economic market also face efficiency challenges when producing consumer goods and services. The first way companies can achieve economic efficiency is by reaching the maximum production output of consumer goods or services without increasing the economic resources or inputs needed to produce the goods or services. All companies have a maximum production output with their current facilities or equipment; if companies cannot obtain more of these assets to increase production, they must find other ways to improve economic efficiency.
Another common method companies use when attempting to achieve economic efficiency is by producing consumer goods or services at the lowest cost possible. This type of efficiency focuses mainly on the efficient use of capital, rather than focusing only on the physical economic resources of land or labor. Management or cost accounting is a common tool companies use when tracking the economic efficiency of capital spent when producing goods or services. Management accounting traces all capital spent on economic resources and allocates the portion of business costs used to produce goods or services. This accounting method gives companies an accurate production cost so they can properly determine how much money has been spent on economic resources and how much money may need to be spent when purchasing more economic resources or business inputs.
