Productive Efficiency

Definition of Productive efficiency

Productive efficiency is concerned with producing goods and services with the optimal combination of inputs to produce maximum output for the minimum cost.

To be productively efficient means the economy must be producing on its production possibility frontier. (i.e. it is impossible to produce more of one good without producing less of another).

PPF curve

  • Points A and B are productively efficient.
  • Point D is inefficient because you could produce more goods or services with no opportunity cost
  • Point C is currently impossible.

Productive efficiency and short-run average cost curve

A firm is said to be productively efficient when it is producing at the lowest point on the short run average cost curve (this is the point where marginal cost meets average cost).

srac

Productive efficiency is closely related to the concept of technical efficiency. A firm is technically efficient when it combines the optimal combination of labour and capital to produce a good. i.e. cannot produce more of a good, without more inputs.

Note: An economy can be productively efficient but have very poor allocative efficiency.

Allocative efficiency is concerned with the optimal distribution of resources. For example, if you devoted 90% of GDP to defence, you could be productively efficient, but, this would be a very unbalanced economy.

Related