•  Productivity;
•  Total factor productivity;
•  Production frontier;
•  Technical efficiency;
•  Feasible production set.

The definition of productivity

We can define productivity of a firm as the ratio of the output that it produces to the input that it uses.

When the product process involves a single input and a single output, productivity can be found easily. However, when there is more than one input, which is often the case, then a method for aggregating these inputs into a single index of inputs must be used to obtain a ratio measure of productivity.

Total factor productivity

When we are talking about productivity, generally we are referring to total factor productivity, which is a productivity measure that involves all factors of production. Other measures of productivity, such as labor productivity, fuel productivity and land productivity, are often called partial measures of productivity. These partial productivity measures can provide a misleading indication of overall productivity when considered isolated.

Production frontier

Production frontier may be used to define the relationship between the input and the output. The production frontier represents the maximum output attainable from each input level.

Technical efficiency

When firms operate in the production frontier they are technically efficient.

Feasible production set

It is the set of all input-output combinations that are feasible. This set consists of all points below the production frontier. The points along the production frontier define the efficient subset of this feasible production set.

Productivity and performance measurement

Productivity is concerned with measuring the performance of firms, which convert inputs into outputs. An example of a firm is a computer factory that uses material, labor and capital (inputs) to produce computers (output). The performance of this kind of factory can be defined in some ways. For example a basic measure of performance is a productivity ratio.

What is a productivity ratio?

It is the ratio of outputs to inputs, where larger values of this ratio are associated with better performance.

Note that performance is a relative concept, because for example, the performance of the factory in 2021 can be measured relative to its 2020 performance, or 2019, or 2010, etc.

The methods of performance measurement can be applied to a variety of firms or “decision making unit”, as can be named in some of the literature on productivity and efficiency analysis. They can be applied to private sectors firms producing goods or to service industries. The methods may also be used by a particular firm to analyze the relative performance of units within the firm or to measure the performance in non-profit organizations.

Even the context of productivity analysis mentioned above involve micro-level data, the methods can be used for making performance comparisons at higher levels of aggregation, like the performance of an industry over time or across geographical regions, and so on and so forth.

The methods of performance measurement differ according to the type of measures they produce, the data they require and the assumptions they make regarding the structure of the production technology and the economic behavior of decision makers.

What are the requirements for performance measurement?

Some methods only require data on quantities of inputs and outputs while other methods also require price data and various behavioral assumptions, such as cost minimization, profit maximization, etc.