The PPF 2: Productive Efficency (Microeconomics)

Productive efficiency simply implies that in the process of production all resources in the economy are used efficiently, such that given some production level of X and Y there are no resources left with which to produce more output. Drawing the PPF under this assumption also enables us to discuss scarcity as the PPF clearly illustrates combinations of output that are obtainable and unobtainable.

Productive efficiency and the PPF

Three output combinations have been highlighted on the PPF below, of these three output combinations only two are obtainable and of these only one is productively efficient, see if you can figure them out.

In the above PPF the three output combinations have been labelled A, B and C. Point A lies within the boundary drawn by the PPF, point B lies exactly on the PPF and point C is beyond the PPF. So which two are obtainable?

Remember that the PPF illustrates all combinations of production (of two goods) that are possible for an economy with a given set of resources, when these resources are combined in the most efficient manner. Therefore any point that lies within the PPF is technically obtainable, but is inefficient as producing at this level means that there is excess capacity. Output of X or Y could be increased without sacrificing the production of either. Hence there exists no trade off when increasing production from a point within the PPF as doing so requires only the employment of a previously underutilized resource endowment. All points along the PPF represent the combinations of output that are at the limits of the economy's productive capacity, and hence are productively efficient.

So both points A and B can be produced by this economy (with B being the productively efficient choice) leaving point C as a combination of output that is unobtainable.

C is illustrated as being unobtainable as it lies beyond the PPF, indicating that given the economy's current endowment of productive resources it is impossible for that specific combination of output to be obtained.

If the level of resources available within the economy were to increase or the technology with which these resources were combined improved, then we would observe an outward shift of the PPF. This outward shift of the PPF would result in more combinations of X and Y becoming obtainable and productively efficient. If the resource endowment or level of technology were to increase enough then it is possible that point C could come to represent a productively efficient level of output.

follow the links to visit part 1 or part 3 of the PPF series of posts