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Business, MBA, production, revision

Optimal Scale and X-Inefficiency

Considerable knowledge (aka perfect information) is required to understand/calculate the optimal technical output for a firm, but it must be understood so that a firm can make the best decisions regarding production. It must be noted that sometimes it is not possible for a firm to actually produce on the ‘optimal technical efficiency’ because there is simply not enough demand.

The X-Inefficiency is also known as the ‘production cost gap’ and is found in companies that are producing the maximum output, but are not producing at the optimum technical efficiency. There are several reasons this may occur:

  1. the firm is not producing at the optimal scale of production.
  2. the firm does not function efficiently and wastes resources.

It can be seen from the diagram above that there are several points of interest. These include:

  • X’ is the point where maximum output is reached but the cost of production is too high, as it does not sit in the Average Total Cost Curve.
  • the vertical distance between X’ and the ATC Curve is the X-Inefficiency.
  • X is a poor position for a firm to be producing at, as the cost of production is high (above the ATC Curve) and output is low. This firm would be in danger and would require restructuring.
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About loganjehall

I focus on building an internal culture focussed on listening to and working alongside customers to build value for all stakeholders. Real lasting change that understands the real needs of the customer is the only way to ensure a dynamic constant state of learning and innovation. I am a highly experienced sales, marketing and business professional with wide ranging experience in varied industries. Having worked in both B2B and B2C I understand sales and business is really about P2P (people to people) and therefore always focus on relationships and engagement. "Business is socialising with a purpose" (Gaping Void) Passion, people, vision, strategy, customers, advocates, believers, innovation, customer engagement, social, knowledge management and appropriate use of technology are vital in the attainment of business goals. I am a co-founder of Movebubble, a new technology startup in #Proptech. This blog is really here to allow me to develop my voice and ideas, and gain feedback from a wider audience than just the lecture or breakout room. Hopefully i can introduce some interesting points, and experiment with digital, marketing, engagement, social media and SEO techniques and tips i am learning on the way. I hope you enjoy my posts, please let me know what you think with some feedback.

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