Key terms
- X-inefficiency
- X-inefficiency is producing an output at a higher cost per unit than the lowest possible for that output, because a firm lets its costs drift upward.
- Productive efficiency
- Productive efficiency is producing goods at the lowest possible average cost, at the bottom of the average cost curve.
Sources of organisational slack
Can you name three ways a firm lets its costs rise above the lowest possible?
Definition
Overstaffing is employing more workers than the output needs, so the wage bill per unit is higher than it has to be.
Can you think of an example?
Example
A depot keeps twelve drivers on the rota for work that ten could cover.
Definition
Overpaying for inputs is buying materials, energy or services at more than the lowest price available for the same quality.
Can you think of an example?
Example
A firm renews its energy contract with the same supplier every year without asking any rival supplier for a price.
Definition
Weak management effort is managers failing to organise work, control spending or adopt known cheaper methods.
Can you think of an example?
Example
Managers approve prestige offices and first-class travel that add nothing to output.