Productive efficiency

An example PPF: points B, C and D are all productively efficient, but an economy at A would not be.

Productive efficiency can also be illustrated by the intersection MC=A(T)C.

Productive efficiency (also known as technical efficiency) occurs when the economy is utilizing all of its resources efficiently, producing most output from least input. The concept is illustrated on a production possibility frontier (PPF) where all points on the curve are points of maximum productive efficiency (i.e., no more output can be achieved from the given inputs). An equilibrium may be productively efficient without being allocatively efficient i.e. it may result in a distribution of goods where social welfare is not maximized. Ideal efficiency is unit value i.e. 1 and practically it should near to unit value i.e. 1

This takes place when production of one good is achieved at the lowest cost possible, given the production of the other good(s). Equivalently, it is when the highest possible output of one good is produced, given the production level of the other good(s). In long-run equilibrium for perfectly competitive markets, this is where average cost is at the base on the average (total) cost curve i.e. where MC=A(T)C.

Productive efficiency requires that all firms operate using best-practice technological and managerial processes. By improving these processes, an economy or business can extend its production possibility frontier outward and increase efficiency further.

Due to the nature of monopolistic companies, they will choose to produce at profit maximizing levels (where MC=MR). They may not be productively efficient, because of X-inefficiency, whereby companies operating in a monopoly have less of an incentive to maximize output due to lack of competition. However, due to economies of scale it can become possible for monopolistic companies to produce at MC=MR with a lower price to the consumer than perfectly competitive companies producing at MC=A(T)C.