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. Thus firms earn zero economic profits and consumers pay a price equal to the marginal cost of producing the good. This result defines economic efficiency or, more precisely, allocative economic efficiency.
Empirical research suggests, however, that a number of firms do not produce at the point where long run average costs are minimized. Some of this can be explained away by the mechanics of imperfect competition; what cannot be explained by traditional economics is described as X-inefficiency.
The joint measurement of technical and allocative inefficiencies: an application of Bayesian inference in nonlinear random-effects models.
Sep 01, 2005; 1. INTRODUCTION Mainstream neoclassical economic theory assumes that all firms/producers in an economy always operate...