A Level Economics AQA Practice Exam

What does it mean for an economy to be productively inefficient?

1. Producing at maximum potential output

2. Having resources allocated perfectly

3. Producing below the lowest unit cost

4. Meeting all consumer expectations

The correct answer is: Producing below the lowest unit cost

When an economy is described as productively inefficient, it indicates that the production process is not optimized. Specifically, producing below the lowest unit cost means that there are opportunities to reduce costs and make better use of available resources. This inefficiency arises when an economy could achieve a higher level of output without increasing inputs, essentially failing to utilize its resources—such as labor, capital, or technology—most effectively. Being productively inefficient often suggests that the economy operates inside its production possibility frontier. In this scenario, not all resources are being utilized to their fullest potential, which can lead to lower overall productivity. Such a situation could stem from various factors, including underemployment of labor, wastage of materials, or outdated production techniques. In contrast, the other statements denote conditions of efficiency or optimal use of resources. Producing at maximum potential output implies that an economy has reached its production capabilities, while having resources allocated perfectly suggests that every resource is in its most effective use. Meeting all consumer expectations, although important for customer satisfaction, does not directly relate to productivity or unit costs. Thus, the key point is that productively inefficiency signifies an inability to achieve the lowest possible costs in production, underscoring the importance of efficient resource allocation to drive economic performance