Productive efficiency happens when a company or an economy produces goods at the lowest possible cost, using the fewest resources allowed by current technology.
Simply put, no extra output can be created without adding more inputs, and the same amount of output cannot be made with fewer resources.
Core Concepts:
- Production Possibility Curve (PPC): Efficiency occurs when production happens exactly on this curve, meaning there is no waste.
- Optimal use of resources: Every resource is being used to its full potential.
Two Main Types:
- Technical efficiency: Using the smallest amount of materials or labor to create a product.
- Allocative efficiency: Producing the exact mix of goods that consumers want most.
Efficiency for Firms and Economies:
- Individual firms are efficient when their Average Cost (AC) is at its lowest point.
- Economies are efficient when they operate on the outer edge of their production possibilities, rather than inside the curve.
How to Measure Productive Efficiency:
- Cost per unit produced
- Output per individual worker (Labour productivity)
- Total factor productivity (output compared to all combined inputs)