Any appropriate human activity is associated with how effective it is. In any case, the effectiveness of certain actions is determined by economic efficiency and prudence, and is evaluated in accordance with the results that were obtained from each unit of the involved resource in production. Thus, the economic effect of any company is determined in order to understand how such a business is relevant for its owner.
The effectiveness of any company shows how effectively it works and how much it affects the overall growth of the welfare of its country and its population. Thus, the economic effect of production is defined as the optimal use of resources in accordance with social needs. It depends on this concept whether it is advisable to maintain the work of certain companies.
Effect and effectiveness
In order to determine the effectiveness of a particular production from the point of view of the economy, as well as determine its criteria and indicators, it is necessary to correctly understand that such concepts as economic effect and efficiency are different.
The effect is an absolute value that shows the results achieved during the execution of a particular procedure. The economic effect is the result of human labor used to create certain material goods. Of course, ensuring the result in itself is quite important, but it is equally important to know what forces achieved it. For this reason, often the annual economic effect, as well as the costs of achieving it, is the basis for calculating economic efficiency.
In addition to the absolute value, it is also necessary to determine the relative value of the effect, which is calculated by dividing the total result obtained by the resource costs necessary to obtain it.
Overall and comparative effectiveness
In accordance with these definitions, in practice, general as well as comparative economic efficiency is shared.
The overall or, as it is also called, absolute efficiency is determined at each individual level of management and can be calculated as how the monthly or annual economic effect relates to individual types of resource costs.
Indicators
In this case, two things are summarizing indicators:
- growth of production GDP per capita;
- GDP production per monetary unit of expenditure.
The indicators used to evaluate the economic effect on a regional, industry, or national economy level do not practically differ from the indicators used at the level of primary business entities, while they are exclusively private. At the company level, the system of indicators of the overall economy. Efficiency includes not only indicators for the types of resources spent, but also estimated.
Profit should be mentioned as the main evaluation indicator of the company’s activity, since it is possible to calculate the economic effect from it. Other estimates include the following:
- profitability of production assets;
- relative savings in working capital and fixed assets, as well as labor and material costs;
- production for each monetary unit of expenditure.
If we talk about indicators of the overall economic efficiency of the resources used, then they will be indicators of the use of labor resources, that is, production assets.
Labor force utilization rates
There are several key indicators of labor utilization. One of them - labor productivity.
This indicator allows you to determine the ratio of the number of products and the number of living labor.
Despite the fact that this option for determining productivity is quite universal, there are certain differences in the calculations, as well as labor productivity indicators at the microeconomic and macroeconomic levels, since it is not possible to calculate the economic effect only by this parameter.
If at the scale of a certain National economy If the calculation of productivity is carried out, then in this case the result of labor is the annual GDP or national income, after which it is distributed to the number of employees participating in the national economy. This number in this case is the average annual number of employees.
At the same time, at the company level, labor productivity is calculated by dividing the proceeds from the sale of the monthly or annual volume of a certain product by the average number of employees involved in the production process. The degree of productivity of living labor collects the effect of the interaction of various production factors, as a result of which labor productivity is integral indicator which determines the economic effect and economic efficiency.
Labor input
This indicator has the exact opposite value of labor productivity, because in this case, the ratio of the cost of working time to manufactured products is determined. The decrease in labor intensity is an extremely important indicator of the productivity of any labor, and the economic effect and economic efficiency directly depend on it.
Capital ratio
This indicator allows you to determine the degree of equipment of labor. It is measured by the ratio of the book value of all fixed assets to the cost of living labor necessary for the production of a particular product.
What do they show?
Indicators of economic effect allow to determine the effectiveness of the selection of already used costs. Thus, with their help it is possible to determine how appropriate the costs were, and whether it is possible to determine the reserves for increasing production efficiency. In addition, the use of these indicators is often found in controlling and managerial activities to improve the overall performance of the company.
The market economy often uses indicators that determine the comparative economic effect of the enterprise, since they allow you to determine the most economically advantageous options for solving any business problems.
Comparative performance
Comparative economic efficiency is established in the process of development and subsequent implementation of new equipment, as well as solving issues related to the production and use of various products and interchangeable materials, reconstruction of existing enterprises, when designing new construction, drawing up business plans, as well as choosing production organization schemes in scientific or technological activity.
When determining comparative efficiency as the value by which the economic effect is established (example), the economy is taken, resulting from the reduction in the cost of a product. In this case, any additional capital investments are used as costs, with the help of which this economy was achieved. The determination of comparative economic efficiency is carried out in the process of choosing one of several options for solving a particular economic problem, that is, this indicator allows you to understand what advantages one option has over others.
Compare options
In the process of comparing several options, a very different ratio of required investments and the level of cost of production is provided. The option that will provide the opportunity to use less financial investment and at the same time provide a lower cost of production, ceteris paribus, will be recognized as the most profitable from an economic point of view.
Comparative effectiveness is entirely based on the analysis of marginal indicators and is used to determine how effective the decisions are made in the short term, and also to identify the best option for the use of resources.
Comparing several options, you will need to use the reduced costs, which are calculated for each of them. Ultimately, the reduced costs for all options will be the sum of capital investments, as well as current costs, reduced to a single dimension in full compliance with performance standards. Thus, the smallest of them will be the most effective option.
How is the economic effect calculated?
There is nothing simpler than defining an economic effect, because it is simply a deduction of expenses from profit. Moreover, that product, which in value terms will exceed the cost of its production, is usually called profit. However, this option refers exclusively to the monthly effect, while the annual one is calculated using a slightly different formula:
- Revenues for the year - (normative efficiency ratio * costs per year).
Thus, an enterprise may even be unprofitable for a certain month if, for example, in the process of work, it decided to introduce some new industries that required additional costs, and therefore it is more advisable to always take into account the annual economic effect, determining the appropriateness of work one or another company.
Economic efficiency and its calculation
Economic efficiency is determined by dividing the production results by the costs necessary to obtain this result.
It is worth noting that in practice, the use of such a formula is quite complicated, because indicators are rarely quantifiable and cannot be calculated in any general unit. In the overwhelming majority of cases, the results of one or another activity are diverse, as a result of which it is impossible to reduce them into a single result, even if some universal money meters are used. In some situations, the result may be exceptionally high-quality and generally not be able to be expressed in numerical form. In particular, various social results should be attributed to this situation.
The problem of efficiency is always a problem of choice, including the choice of types of products, technologies, their distribution, the amount of resources used and much more.
The principle of comparative advantage, which is not only the basis of specialization in modern countries as a whole, but also in particular individual producers, is always the basis for determining effectiveness, and it is also the cornerstone of free trade. It is due to the fact that it is possible to determine the comparative advantage of using a certain product over another, it is possible to determine the most effective production option, which provides the opportunity to get the maximum possible difference between the costs and results obtained, as well as determine the opportunity cost of each resource.
In this regard, efficiency is determined by correlating the values of the goods produced with the values of those goods, the production of which ultimately had to be abandoned because of their higher alternative prices.
