page_title: Productive efficiency
section_title: Marginal and average total cost
hierarchical_section_title: Productive efficiency / Model / Marginal and average total cost
context_page_description: In economics, productive efficiency is a situation in which an economy is not able to produce any more of one good without reducing the production of another good. As resources are limited, it is not possible for more units of a good to be produced without taking away the resources used for producing another good. The concept of productive efficiency can be shown on a production possibility frontier, where all points on the curve are productively efficient.
  Productive efficiency refers to the maximum amount of output that an economy can produce at a certain point in time. However, if firms in the economy were to improve on their production methods and increase productivity, it is possible for the PPF to shift outwards, thus allowing more goods to be produced than before.
  Productive inefficiency happens when factors of production are not used to its maximum. For example, labor in the form of workers may be sitting and not doing any work. If the worker were to be used to produce more output than before, then having the worker not doing any work would be productively inefficient.
context_section_description: For a firm that is producing a certain type of good, it would have the marginal cost (MC) and average total cost (ATC) curves when producing an additional unit of output as shown in the diagram.
  By definition, the MC curve will meet the ATC curve at its minimum point, which is the point P1 and Q1 on the diagram. At this point, producing more than Q1 would bring more costs than benefits to the firm, whereas producing less than Q1 would mean that there are more benefits than costs in producing more of the good. Hence, the point P1 and Q1 would be a point that is just right, and all the resources of the firm would be fully used in the best possible way.
  In reality, firms that are less competitive are unlikely to be producing at the productively efficient point as they are earning supernormal profits and have no need to cut costs. These firms are thus considered to be X-inefficient.
caption: Productive efficiency occurs at the minimum of average total cost curve for the good