The Concept of Economic Efficiency 31 



this objective can be illustrated in a manner similar to the demon- 

 stration of efficient combination of consumers' products. 



Figure 6 is comparable to Figure 4 in all respects except that 

 an outlay line reflecting the prices of X and Y is included. This 

 diagonal line represents all the different combinations of X and Y 

 which can be obtained for the same outlay. The intercept on the Y 

 axis represents the amount of factor Y which could be purchased 

 if a given outlay were expended entirely for the purchase of Y. 

 The X intercept correspondingly represents the amount of X avail- 

 able if the same outlay were used to purchase X alone. The slope 

 of the line is determined by the ratio of the prices of X and Y, 

 that is, Px/Py. 



Since the outlay budget can purchase the two factors in a variety 

 of combinations and the output also can be achieved by various 

 combinations of factors, the most economically efficient means will 

 involve selecting a combination which will maximize output for 

 the specified outlay. The obvious choice will be the one in which 

 the constant outlay line reaches the highest product curve, at S. 

 The point of tangency (as in the case of commodity substitution 

 in the problem involving the consumer) is the point at which the 

 marginal rate of substitution between the factors is equal to the 

 ratio of their prices. At any other point of contact between product 

 curves and the outlay line — for example, Q or R — it will be pos- 

 sible to obtain output, but the quantity produced with those factor 

 proportions will be less than that available when the marginal 

 rate of substitution and the price ratios are equal. 



The problem of choosing the most efficient scale of operation 

 corresponds to the choice of the most efficient proportions. The 

 rate of return will depend not only on the cost of factors, but on 

 the rate of output and on product prices. Thus, profit maximi- 

 zation will involve determination of the rate of output given factor 

 costs and product prices. 



In the short run (defined as a period insufficiently long to permit 

 changes in plant and equipment), expansion of output by increas- 

 ing all factors save capital will encounter diminishing marginal 

 productivity. Increasing marginal inputs per unit of output at 

 constant factor prices will result in rising marginal costs. The 

 efficient level of output is thus determined by the point at which 

 the cost of marginal inputs equals the value to the producer of the 

 additional unit of output, namely, the market price. Short of this 



