Figure 12-2 Productive Efficiency and the Production Possibilities
Boundary
Now think about the economy’s production possibilities boundary
(PPB), which we first saw in Chapter 1 and which is shown again in
Figure 12-2. The PPB shows the combinations of output of two products
that are possible when the economy is using its resources efficiently. An
economy that is producing at a point inside the PPB is being productively
inefficient—it could produce more of one good without producing less of
the other. This inefficiency may occur because individual firms are not
minimizing their costs or because, within an industry, marginal costs are
not equalized across the various firms. Either situation would lead the
economy to be inside its production possibilities boundary.
If firms and industries are productively efficient, the economy will be on, rather than inside,
the production possibilities boundary.Any point on the production possibilities boundary is productively
efficient. The boundary shows all combinations of two goods X and