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Category: Most Popular Resources
Title : Minimum Efficient Scale
Minimum efficient scaleThe minimum efficient scale is defined to be the first point on the LRAC (long-run average cost) curve.
[Diagram goes here - download the original pdf to see it.]
This graph is also drawn to illustrate the idea that the LRAC is often "flat-bottomed". This means that there is a range of sizes of firm at which there is maximum efficiency. The minimum efficient scale is the smallest firm at which this maximum efficiency is obtained. It is the MES (minimum efficient scale) that determines the structure of an industry.
To show why, suppose, for example, that the market requires an output from the industry of 100 units of a given product. Suppose that the MES is at 20 units. Then this implies that the industry will be an oligopoly with [Equation goes here - download the original pdf to see it.] competing firms. If the LRAC was "flat-bottomed" then the industry would be highly competitive; because that would mean that each of the 5 competing firms could increase profit by increasing output, On the other hand, suppose the market requires an output of 10,000 units and the MES is just 1 unit. Then there would be 10,000 firms each producing just one unit, and the industry would be in perfect competition. So it is the minimum efficient scale that determines the basic structure of the market.
The larger the MES (minimum efficient scale) the closer the industry structure to monopoly becomes.
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