Production Efficiency

Aw, the fresh air of economic efficiency.

Production efficiency is achieved when a firm is producing goods so efficiently that they can’t produce more in one area without producing less in another area.

If this sounds like the production possibility frontier, or production possibilities curve (PPC), that’s exactly what this is. When production is efficient, firms are producing on the PPC: they’re fully utilizing all available resources. That means no waste in the inputs, creating the maximal output. Making the most with the little you have (literally the most possible), making lemonade from lemons...this is the stuff of production efficiency.

All points on the PPC are production efficient, so take your pick. But if you’re producing at one point on the PPC and want to switch to another on the PPC, there will be tradeoffs. If a firm is making rubber ducks and rubber tires at production efficiency, then that means they’d have to sacrifice some rubber ducks to make more tires, or vice versa.

How can you look those rubber duckies in the eyes and do that to them?

See: Production Possibility Frontier.