Figure 12-1 Productive Efficiency for the Industry
Productive efficiency for the industry requires that the marginal cost of production be the
same for each firm.To see why marginal costs must be equated across firms, consider a
simple example that is illustrated in Figure 12-1. Aslan Widget
Company has a marginal cost of $80 for the last widget of some standard
type it produces. Digory Enterprises has a marginal cost of only $40 for its
last widget of the same type. If Aslan were to produce one fewer widget
and Digory were to produce one more widget, total production would be
unchanged. Total industry costs, however, would be lower by $40.
Productive efficiency for the industry requires that marginal costs for
the production of any one product be equated across firms. At the
initial levels of output, and marginal costs are $80 for Aslan and
$40 for Digory. If Digory increases output by to and Aslan
reduces output by the same amount to total output is unchanged.
Aslan’s total costs have fallen by the light-shaded area, whereas Digory’s
total costs have increased by the smaller dark-shaded area. Total industry
costs are therefore reduced when output is reallocated between the firms.
When marginal costs are equalized, at $60 in this example, no further
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