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Home » Economics Homework Help » Microeconomics Help » Production Inefficiency
Production Inefficiency
Another important reason for the economy to find itself operating inside the production possibility curve is when it is using its resources inefficiently. We achieve production efficiency in the use of resources if its using its resources and technology, more of one good cannot be produced by a reduction in the output of the other. If the resources are not being used efficiently, then the production of both the goods could be increased or the production of one good can be increased without producing less of the other. For example, if land of a village which is better suited for the production of wheat is wrongly employed for the production of cotton, the economy will not be using its resources efficiently which will be result in loss of output. This will remain the economy work below or perform a specialized job in the production of cotton cloth for wheat; we will not be maximizing output from our given resources. We could get more wheat and cloth if we employ the workers and engineers for the tasks that closely match their skills.

Take another example, if manages of firms lack incentives to maximize output from the given resources (or to minimize cost to produce a given output, economy will not be making optimum use of its resources resulting in loss of output. As a consequence, the economy will be operating below the production possible curve. This applies both to the managers of public and private corporate sector. It is claimed by some that it is the lack of incentives on the part of managers in the former Communist Soviet Russia and in the various public enterprise s in India which are incurring heavy loses that is responsible for low productivity and poor performance of public enterprises.

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