In the last blog, we covered few concepts including opportunity cost, possible productive curve, and factors of production. While in this blog, we will begin with discussing the relation between the factors of production and production possibility curve. Just a reminder: factors of production contains land, capital, enterprises, and labor.

Any change in these factors will cause an outward shift for the production possibility curve, which showed by this graph.   

The reason for this outward shift is that the increase in labor, for example, will help the manufactory produce more, due to more people are engage in the production process. as same as the increase in capital, more machine are used for production, which will definitely increase the output for both goods.

As we are considering the shifting reasons for production possibility curve, it is necessary to point out  these three different situation:

For point A, which is defined as inefficient, occurs while the manufacture disabled to allocate all the factors of production in the most efficient way, problems like slack staff, or ineffective communication may exist. For point B, which is defined as efficient, occurs while the manufacture allocate all the factors of production in the most efficient way, thus the manufacture will produce the amount of good A and good B in the maximum combination. For point C, which is defined as impossible, is exactly what we discussed above. Improvement in the factors of production will help this “impossible” to “possible”

Economists invented a lot of concepts to understand the word “efficiency” in an economic way.

For the first one: economic efficiency

economic efficiency is about making optimal use of scarce resources to satisfy needs and wants. it means optimum allocation of resources, where the marginal social benefit is equal to marginal social cost (the concept of Margin will be covered in later blogs). This means that in order to satisfy economic efficiency, people need to satisfy both allocative efficiency and productive efficiency. Allocative efficiency happened when average revenue( total revenue divided by total output). Productive efficiency is happened while the output is produced at long run minimum average cost( total cost divided by total output), which is also where average total cost equal to marginal cost.

Technical efficiency is occur when there is no possible to increases output without increasing input. Every lowest point on the average total cost curve represent the technical efficiency.

Static efficiency, which represent the allocative efficiency and productive efficiency in the short run( a short period), or at a given point in time.

Dynamic efficiency, which represents the productive efficiency of a firm in long run( a long period of time) or over time due to engaging in technology advance.

Here is another very interesting efficiency named Paretto efficiency. This means that it is impossible to make one party better off without making someone worse off. the resources are distributed in the most efficient way, and satisfy both allocative efficiency and productive efficiency.

What dose it related with the “game theory”? We will find out in the next blog.