Efficiency of Variables Used in Study

Source: Coelli, Rao, Battese, 1998 Equation 3.1 is equal to 1 – DA0A. It will take value between zero and one, and therefore provides an indicator of the degree of technical inefficiency of the firm. A value of one indicates the firm is fully technically efficient. The point D is technically efficient because it lies on the efficient isoquant. If the input price is also known, represent ed by CC΄ the slope of isocost in Equation 3.1, permits the measurement of AE. The AE of the firm operating at A is defined to be ratio as on Equation 3.2. AE i = 0B0D Where: AE i is the input orientated allocative efficiency 3.2 The distance BD represents the reduction in production costs. If the production were to occur at point D, the allocatively and technically efficient would occur. While the point D΄ shown the technically efficient but allocatively inefficient. The achievement of the TE and AE implies EE. The EE is defined to be ratio as Equation 3.3. x 2 y S A D B D΄ S΄ x 1 y C΄ C Figure 3 Technical and Allocative Efficiencies of Input Orientation EE i = 0B0A Where: EE i is the input orientated economic efficiency 3.3 The distance BA could also be interpreted in terms of cost reduction. The EE is also could be calculated by Equation 3.4. TE i x AE i = 0D0A x 0B0D 3.4 It could be done because the product of the TE and AE measures provides the measures of overall economic efficiency. All of three measures bounded by zero and one.

3.2.2 Output Orientated

The alternative question about eff iciency is “How much quantity of outputs can be proportionally increased without changing the input quantity used?” The output oriented measures is opposed to the input oriented measures. The difference between the input and output oriented measures can be seen in Figure 4, which is using a simple example involving one input x and one output y. Source: Coelli, Rao, Battese, 1998 Figure 4 Input and Output Orientated TE Measures and Return to Scale a b fx fx P P R R Q Q S S y y x x A A