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What is X-Efficiency? Meaning.

X-Efficiency is an economic expression for the effectiveness with which an organization uses its given set of inputs to produce outputs. In a theoretical market with perfect competition, there will in general be no X-Inefficiency because if any firm is less efficient than the others it will not make sufficient profits to stay in business in the long term.

X-inefficiency is not the only type of inefficiency in economics. X-inefficiency only looks at the outputs that are produced with given inputs. It does not take account of whether the inputs are the best ones to be using, or whether the outputs are the best ones to be producing. This other last form is referred to as Allocative (Economic) Efficiency.

If a company is producing the maximum output it can given the resources it employs, such as men and machinery, and the best technology available, it is said to be X-Efficient. X-Inefficiency occurs when X-Efficiency is not achieved.

Economic theory assumes that the management of firms act to maximize owners' wealth by minimizing risk and maximizing economic profits -- which is accomplished by simultaneously maximizing revenues and minimizing costs, usually through the adjustment of output. In perfect competition, the free entry and exit of firms tends toward firms producing at the point where price equals long run average costs and long run average costs are minimized.

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