Productive efficiency is achieved when an economy creates the most possible goods through the least possible input, thus maximizing the efficiency of operations. This concept can be compared to allocative efficiency, which is a measurement of how the goods created affect society as a whole. By nature, using the lowest input will also create the lowest cost of production for an economy. The ideal for productive efficiency is to reach the production possibility frontier, which represents the absolute maximum of an economy's production capabilities.
Economic study often focuses on the way corporations, companies, or even economies as a whole utilize the resources they have at their disposal. The ability to use these resources in the most efficient way possible is crucial to the success of any business, and how an economy gets the most out of its resources will also have an effect on society in terms of available goods and price levels. Productive efficiency represents a way of understanding the relationship between the resources an economy has and the way that it uses them.
In terms of productive efficiency, the goal is to create as much as possible by using as little as possible. If an economy can only conceivably produce a certain number of goods with a certain amount of input, that represents the production possibility frontier. This frontier is not immovable, however, for either entire economies or the companies within them. It can be extended by improving production via technological advances or innovative production methods.
Amounts of productive efficiency within an economy are usually determined by market forces. For example, a monopolistic economy, in which one company controls all of the production of a certain product, would likely be inefficient. The monopolizing company would have little incentive to maximize its output, as a scarcer demand for the product would drive up prices for the product and profits for the company. A more competitive society would likely lead to more efficient production.
Allocative efficiency can be looked at in contrast to productive efficiency, or the two concepts can be combined. When determining allocative efficiency, a person must assess how the goods created are benefiting society, as opposed to just measuring the sheer amount of goods. For example, an economy might be efficient at producing leisure items, but it might be lacking in the ability to produce necessary items like medicine. By combining the two concepts, an economy would ideally produce goods in an efficient manner, and these goods would provide the maximum societal benefit.
