For instance, …show more content…
Productive efficiency occurs when goods or services with optimal input to produce superlative output which forces entry and exit firms to operate where average total cost is at minimum. As for allocative efficiency, it occurs when the price that each consumer is willing to pay for it is the same as the marginal utility of the product that they get. Therefore, when marginal utility equals the marginal cost then resource allocation is …show more content…
In addition to cost complications, there are four reasons why these costs occur. The first reason is economies of scale (large-scale production), which occurs when the market demand is not sufficient to support a large number of competing firms that are producing on a minimum efficient scale. Also, economies of scale are also being referred to as the situation where costs of producing an increased output of a unit of a product decrease as the volume of the output increases. Nonetheless, economies of scale also occur when equal percentage of all increases in input can lead to greater output.
The second reason for cost complications in relation to unit cost of production is X-inefficiency. X-inefficiency takes place when a firm produces output at a higher cost than it is necessary to produce it. The reason for that is because firms absolutely cannot maximize profits unless they are minimizing costs. For example, DeLorean Motor Company experienced X-inefficiency when they weren’t able to find the cheapest suppliers to obtain raw material from. Instead, they had to seek out raw materials from a very costly supplier in order to build a new