The name is absent

Reuieip of Islamic Economics, Vol. 8, No. 2, 2004

using minimum inputs, other things remaining unchanged. In (i) we
use a production or output (Y) frontier to measure efficiency while in
(ii) an input or cost (C) frontier is employed. The equations for
determining efficiency scores, their numerical values, interpretations,
and policy implications in the two approaches are quite different. As
writers on Islamic economics have mostly looked at the issue from the
cost angle, this discussion follows suit.

Farell (1957) is credited with being the first to indicate that
productive or economic efficiency has two components. First is the
purely physical or technical component that refers to the ability of a
PU to produce as much output as given input usage allows, or by
using as little input as output constraints permit. Thus, technical
efficiency focuses on avoidance of waste; it essentially has an output
augmentation orientation. Second is allocative efficiency or the price
component: it refers to the ability of a PU to combine inputs and
outputs in optimal proportions commensurate with their current
prices (Lovell and Tatje, 1997).

The measure of technical efficiency is usually defined as the
maximum reduction of all inputs that would allow continual
production of the same output as before. Such input level is treated
equal to unity and indicates technical efficiency because no further
input reduction is feasible, and a score of less than unity by the same
token indicates technical inefficiency measured by one minus the
actual score of a PU. Figure 1 illustrates the basic concepts. Here the
PU is producing a given output Q using an input combination defined
by point, say A. The same level of output could have been produced
by radically contracting the use of both labour and capital back to
point B, that lies on the isoquant associated with the minimum level
of inputs required to produce Q on the basis of available technology.
The input oriented technical efficiency is defined as TE = OB I OA.
However, it is point D where rhe marginal rate of technical
substitution equals the input price ratio P_l / P_l that gives the least
cost combination of inputs for producing Q. Notice that total cost at
C and D is equal. To achieve the same level of cost, i.e. the
expenditure on inputs, would need A to be contracted further to point
C. Hence, the cost efficiency is to be defined as OC / OA.

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