Productive efficiency occurs when the economy is getting maximum output from its resources . The concept is illustrated on a production possibility frontier (PPF) where all points on the curve are points of maximum productive efficiency (i.e., no more output can be achieved from the given inputs). An equilibrium may be productively efficient without being allocatively efficient. In other words, just because a market maximizes the output it generates, that doesn't mean that social welfare is maximized.
Production Possibilities on Frontier Curve
This chart shows production possibilities for production of guns and butter. Points B, C, and D are productively efficient and point A is not. Point X is only possible if the means of production improve.
Production efficiency occurs when production of one good is achieved at the lowest resource (input) cost possible, given the level of production of the other good(s). Another way to define productive efficiency is that it occurs when the highest possible output of one good is produced, given the production level of the other good(s). In long-run equilibrium for perfectly competitive markets, productive efficiency occurs at the base of the average total cost curve, or where marginal cost equals average total cost. Productive efficiency requires that all firms operate using best-practice technological and managerial processes. By improving these processes, an economy or business can extend its production possibility frontier outward, so that efficient production yields more output.
Monopolistic companies may not be productively efficient because companies operating in a monopoly have less of an incentive to maximize output due to lack of competition. However, due to economies of scale, it may be possible for the profit-maximizing level of output of monopolistic companies to occur with a lower price to the consumer than perfectly competitive companies. So, consumers may pay less with a monopoly, but a monopolistic market would not achieve productive efficiency.