Output efficiency happens when resources are used in a way that balances what people want with how goods are produced. This means the marginal rate of substitution (MRS) matches the marginal rate of transformation (MRT). When this balance is reached, the economy makes the most of its resources without waste.

Take the example of bread and milk. If consumers are happy to trade 2 loaves of bread for 1 liter of milk, the MRS is 2. But if producers only need to give up 1 loaf of bread to produce 1 more liter of milk, the MRT is 1. This mismatch means the economy isn’t using resources as well as it could.

To fix this, production should shift. The economy should produce less bread and more milk. As this happens, the MRT increases because producing extra milk gets harder. At the same time, the MRS decreases as people adjust their choices. Eventually, these numbers meet at a point—say 1.5. When that happens, trade-offs between consumers and producers line up, meaning resources are used more effectively.

This idea is shown on the production possibility frontier (PPF). The MRT is the slope of the PPF, while the MRS is the slope of the indifference curve. If the curves cross but aren’t tangent, there’s inefficiency. But when they touch at just one point, it means the economy has reached a good balance between producing and using goods.