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Home > Economics FAQs Blogs > There seems to be conflicting information on whether productive efficiency is the lowest point of average cost (AC) or if this is x-efficiency. Could you clarify?

There seems to be conflicting information on whether productive efficiency is the lowest point of average cost (AC) or if this is x-efficiency. Could you clarify?

Relevant Topics

This question pertains to topics in Microeconomics, such as  Productive Efficiency, X-efficiency, Cost Curves

Definitions:

Productive Efficiency: Productive efficiency is achieved when a firm is producing goods at the lowest possible average cost. It occurs at the point where the average cost (AC) curve is at its minimum, leading to optimal scale production.

X-efficiency: X-efficiency is the degree of efficiency maintained by firms under conditions of imperfect competition. It occurs when output is being produced at the lowest possible cost given the technological constraints.

Detailed Explanation:

Productive efficiency and X-efficiency, though related, address different aspects of firm efficiency.

Productive efficiency refers to the situation in which a firm cannot possibly produce the given output at a lower cost. This is attained at the point of minimum average cost. In the long run, this is where economies of scale are fully exploited, and where the average cost (AC) curve reaches its minimum point. This point corresponds to the quantity where the marginal cost (MC) equals the AC - beyond this point, increasing production would increase average costs.

On the other hand, X-efficiency addresses efficiency under conditions of imperfect competition. Even when a firm is producing at the lowest point on its average cost curve and achieving productive efficiency, it may still be X-inefficient. This is because X-efficiency involves eliminating all inefficiencies, such as organisational slack or waste, which could exist due to lack of competitive pressure.

Recent: 

Toyota Production System: Toyota, the Japanese automaker, is often cited as an example of a company that achieved productive efficiency through its innovative Toyota Production System, reducing waste and lowering its average cost.

Public Utilities: Often operating in a non-competitive environment, public utilities may achieve productive efficiency due to the large scale of operation, but due to lack of competition, they may be X-inefficient, with unnecessary costs persisting.

Summary:

In conclusion, productive efficiency and X-efficiency are related but distinct concepts. Productive efficiency is achieved when a firm produces at the lowest point on its average cost curve, where it has fully exploited economies of scale. On the other hand, X-efficiency addresses the efficiency of a firm in the context of imperfect competition, looking at whether the firm has eliminated unnecessary costs and waste.

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