X-efficiency refers to the degree of efficiency maintained by firms under conditions of competition, focusing on how well a company utilizes its resources to produce output. A firm is X-efficient if it is producing at the lowest possible cost and maximizing its output with the resources available.

X-efficiency delves into the notion that firms can differ in their ability to convert inputs into outputs.

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In Simpler Terms

Think of a local restaurant. It might not have the fanciest equipment or the most exotic ingredients, but through excellent management, teamwork, and customer service, it provides a great dining experience, keeps costs down, and customers coming back. That’s x-efficiency: doing the best with what you have.