Productive efficiency
Encyclopedia
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.
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
is utilizing all of its resources efficiently, producing most output from least input. The concept is illustrated on a production possibility frontier
Production possibility frontier
In economics, a production–possibility frontier , sometimes called a production–possibility curve or product transformation curve, is a graph that compares the production rates of two commodities that use the same fixed total of the factors of production...
(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
Allocative efficiency
Allocative efficiency is a theoretical measure of the benefit or utility derived from a proposed or actual selection in the allocation or allotment of resources....
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
Average cost
In economics, average cost or unit cost is equal to total cost divided by the number of goods produced . It is also equal to the sum of average variable costs plus average fixed costs...
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
Economy
An economy consists of the economic system of a country or other area; the labor, capital and land resources; and the manufacturing, trade, distribution, and consumption of goods and services of that area...
or business can extend its production possibility frontier
Production possibility frontier
In economics, a production–possibility frontier , sometimes called a production–possibility curve or product transformation curve, is a graph that compares the production rates of two commodities that use the same fixed total of the factors of production...
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
X-inefficiency
X-inefficiency is the difference between efficient behavior of firms assumed or implied by economic theory and their observed behavior in practice. It occurs when technical-efficiency is not being achieved due to a lack of competitive pressure...
, 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.