When firms aren’t x-efficient, they are wasting resources in the production process and producing more than what is necessary for consumers.
Firms that have high levels of x-efficiency are able to cut costs, while still maintaining quality and meeting consumer demands.
X-efficiency focuses on whether or not there are too many or too few resources being used in production. It’s also known as capacity utilization.
Theory of X-efficiency
There are two main ways of looking at X-efficiency: one based on costs and the other on productivity.
According to the cost perspective, efficient use of resources means producing more with fewer inputs (like labour). This considers whether a company has maximized its profits given its production levels.
The productivity perspective compares different departments within the organization against each other—for example, production vs sales vs research & development—and sees where potential improvements could be made.
X-efficiency and Growth
When an economy is growing, it means that the economy has been able to increase its output of goods and services in order to satisfy the needs of its population.
For example, if there were only one piece of bread available for every 10 people in an economy, then it would not be possible for everyone to be satiated by this one piece of bread. Therefore, we can say that this economy does not have enough output (or production) relative to its population size; it has low x efficiency.
However, as time goes on and more resources become available within this same economy (e.g., more wheat farmers come), then eventually enough wheat will have been produced so that all 10 people could eat well.
At this point, we can say that our original hypothetical economy has become sufficiently x efficient as now each person gets exactly what they need without any extra resources lying around unused somewhere else (i.e., no “waste”).
Summary
The x-efficiency is a measure of the efficiency of a company, an individual, an industry, or an economy.
It is also important to remember that efficiency and productivity are not the same.
Efficiency refers to a firm’s ability to produce goods and services with a given set of inputs, while productivity measures how much output you can get from each unit of input.
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