reallocation of output can reduce costs—productive efficiency will have
been achieved.
This cost saving can go on as long as the two firms have different
marginal costs. However, as Aslan produces fewer widgets, its marginal
cost falls, and as Digory produces more widgets, its marginal cost rises.
Once marginal cost is equated across the two firms, at a marginal cost of
$60 in the figure, there are no further cost savings to be obtained by
reallocating production. Only at this point is the industry productively
efficient.
Over the next few pages we will see how such an efficient allocation of
output across firms is achieved, but for now the point is simply that if
marginal costs are not equated across firms, then a reallocation of output
is necessary in order for the industry to become productively efficient.
Productive Efficiency and the Production
Possibilities Boundary
If firms are productively efficient, they are minimizing their costs; there is
no way for them to increase output without using more resources. If an
industry is productively efficient, the industry as a whole is producing its
output at the lowest possible cost; the industry could not increase its
output without using more resources.