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The definition of productive efficiency is that any given output is produced for the lowest possible cost.

In the short run, only the minimum point on the SRAC curve is productively efficient - this makes sense because at any other output, the firm could move to a different SRAC curve that would give a lower cost for that output.

However, the LRAC is, by definition, the envelope of all SRAC curve - it shows the cheapest way to produce any given output.

Agree / disagree?

If true, why is it that so many economics sources claim that "productive efficiency is achieved when the firm produces at the lowest point of its AC curve"? Is it simply that firm decisions are perpetually taken in the short run?

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  • $\begingroup$ I am perhaps pessimistic but I neither believe that firms are ever truly efficient nor do I believe that humans in any capacity can realistically plan for anything other than the short term. We are an inherently myopic species. That isn't a definitive answer. Just an applicable opinion. $\endgroup$ – 123 Sep 14 '17 at 2:17
  • $\begingroup$ I do not know which economic sources you refer to. The difference may be that if you consider a competitive market, each firm will produce in the minimum of its LRAC and the number of firms will adjust so that the total production equals the competitive output. A firm producing in any other point of its LRAC will be 'productive-efficient' but will make losses in the long run. $\endgroup$ – Fato Sep 14 '17 at 6:55
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The statement "In the short run, only the minimum point on the SRAC curve is productively efficient" is false.

Suppose producing 1 unit of a good costs 5 dollars. 2 unit costs 8, x>2 units costs 5x. Clearly AC is minimal if you produce 2 units. But perhaps I do not want two units of the good, only one. Why spend the extra 3 dollars on the second good? Producing only 1 unit is also efficient in this case.

Note that this does not contradict your definition "The definition of productive efficiency is that any given output is produced for the lowest possible cost." The given output is 1 unit, and it is produced for 5 dollars, not 7 or 8, so there is no waste. Your definition does not say anything about per unit costs.

My example is also consistent with the definition of productive efficiency that I know.

Productive efficiency is a situation in which the economy could not produce any more of one good without sacrificing production of another good.

Sidenote:
Perhaps you are confusing productive efficiency and minimum efficient scale of production?

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  • $\begingroup$ Isn't your definition of efficiency macro, whereas the OP's is micro? $\endgroup$ – luchonacho Sep 14 '17 at 8:41
  • $\begingroup$ @luchonacho I think mine is from Mas-Colell Whinston Green, so it would be micro. More precisely general equilibrium theory. $\endgroup$ – Giskard Sep 14 '17 at 8:42
  • $\begingroup$ Yes. What I meant was OP's focus is on a single firm, whereas yours is on the aggregate. $\endgroup$ – luchonacho Sep 14 '17 at 8:44
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    $\begingroup$ @luchonacho You mean because the Wiki entry says economy. The definition is perfectly workable for single firms: "Productive efficiency is a situation in which a firm could not produce any more of one good without sacrificing production of another good." $\endgroup$ – Giskard Sep 14 '17 at 8:46
  • $\begingroup$ @luchonacho PS: I still cannot find any other 'micro' definition of productive efficiency. $\endgroup$ – Giskard Sep 14 '17 at 8:49

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