Productive Efficiency

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    Productive efficiency occurs when a firm is on the minimum point of its AC curve. Output is being produced at the lowest possible average cost. The firm is using the least amount of inputs to produce a given level of output.

    An economy is productively efficient if it is producing on the edge of its PPF, that is, if output is maximized in any mix with resources fully employed. Given the production of good X, the production of good Y is maximized.

    Any point inside the PPF is productively inefficient because output is not maximized. Either more resources can be used and/or current resources can be used more efficiently to increase the production of X and/or Y.

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