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Production efficiency is the point at which an economy cannot increase output of a good or service without lowering the production level of another product. An economy that operates along its production possibility frontier has maximized its production efficiency.

In a simple example, an economy produces two goods – cars and houses. Cars are plotted on the horizontal axis of a graph, and houses on the vertical. If the economy devotes all of its resources to houses, it can make 1 million of them. If it devotes all resources to cars, it can make 1.5 million automobiles.

If the economy splits its resources evenly, it can make 500,000 houses and 750,000 cars. The line that connects all three points is the production possibility frontier.

If the economy is producing cars and houses along this frontier, it has maximized its production efficiency. That means all resources are being used properly. Points to the left of the line represent a waste of resources. Points to the right are unattainable.

Efficient production is achieved when products are made for the lowest possible cost. Economies and companies strive to produce goods using the fewest resources available. Those that are the most efficient typically profit the most. When an economy or company can’t make more of a good or service without sacrificing the production of another, a maximum level of production has been reached.

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