Productive efficiency has two aspects, one concerning production within
each firm and one concerning the allocation of production among the
firms in an industry.
Productive efficiency for the firm requires that the firm produce any
given level of output at the lowest possible cost. In the short run, with at
least one fixed factor, the firm merely uses enough of the variable factors
to produce the desired level of output. In the long run, however, different
methods of production are available. Productive efficiency requires that
the firm use the least costly of the available methods of producing any
given output—that is, firms are located on, rather than above, their long-
run average cost curves.
Productive efficiency for the firm requires the firm to be producing its output at the lowest
possible cost.Any firm that is not being productively efficient is producing at a higher
cost than is necessary and thus will have lower profits than it could have.
It follows that any profit-maximizing firm will seek to be productively
efficient no matter the market structure within which it operates—perfect
competition, monopolistic competition, oligopoly, or monopoly.
Productive efficiency for the industry requires that the industry’s total
output be allocated among its individual firms in such a way that the total
cost in the industry is minimized. If an industry is productively inefficient
it is possible to reduce the industry’s total cost of producing any given
output by reallocating production among the industry’s firms.