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Productive efficiency is achieved by creating as many goods as possible with the least possible inputs, while allocative efficiency measures the impact of goods on society. The goal is to reach the production possibilities frontier, which can be extended through technological advances. Market forces determine efficiency, and a competitive market is more efficient. Allocative efficiency considers the social benefit of goods produced.
Productive efficiency is achieved when an economy creates as many goods as possible through the least possible inputs, thereby maximizing the efficiency of operations. This concept can be compared to allocative efficiency, which is a measure 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 possibilities frontier, which represents the absolute maximum of an economy’s productive capabilities.
Economic study often focuses on how corporations, businesses, or even economies as a whole use the resources at their disposal. The ability to use these resources as efficiently as 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 is a way of understanding the relationship between an economy’s resources and how it uses them.
In terms of production efficiency, the goal is to create as much as possible using as little as possible. If an economy can conceivably produce only a certain number of goods with a certain input, this represents the production possibility frontier. This frontier is not static, however, either for entire economies or for the societies within them. It can be extended by improving production through technological advances or innovative production methods.
The quantities of productive efficiency within an economy are generally determined by market forces. For example, a monopolistic economy, in which one company controls all production of a particular product, would likely be inefficient. The monopolizing company would have little incentive to maximize its output, since lower demand for the product would increase product prices and profits for the company. A more competitive company would likely lead to more efficient production.
Allocative efficiency can be seen in contrast to productive efficiency, or the two concepts can be combined. In determining allocative efficiency, a person must evaluate how the goods created are benefiting society, rather than simply measuring the sheer quantity of goods. For example, an economy might be efficient at producing leisure items, but might not be able to produce necessary items such as medicine. Combining the two concepts, an economy would ideally produce goods efficiently and these goods would provide the maximum social benefit.
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