Minimum Efficient Scale

Minimum efficient scale corresponds to the lowest point on the long run average cost curve and is also known as an output range over which a business achieves productive efficiency.

Minimum efficient scale corresponds to the lowest point on the long run average cost curve and is also known as an output range over which a business achieves productive efficiency.

MES is not a single output level – more likely, the MES is a range of outputs where the firm achieves constant returns to scale and has reached the lowest feasible cost per unit.

The minimum efficient scale depends on the nature of costs of production in a specific industry.

• 1.How many firms can "fit" in a market? It depends on the size of the market compared to the size of the minimum efficient scale

• 2.In industries where the ratio of fixed to variable costs is high, there is scope for reducing unit cost by increasing the scale of output. This is likely to result in a concentrated market structure (e.g. an oligopoly, a duopoly or a monopoly) – indeed economies of scale may act as a barrier to entry because existing firms have achieved cost advantages and they then can force prices down in the event of new businesses coming in
• There might be only limited opportunities for scale economies such that the MES turns out to be a small % of market demand. It is likely that the market will be competitive with many suppliers able to achieve the MES. An example might be a large number of hotels in a city centre or a cluster of restaurants in a town. Much depends on how we define the market!
• With a natural monopoly, the long run average cost curve continues to fall over a huge range of output, suggesting that there may be room for perhaps one or two suppliers to fully exploit all of the available economies of scale when meeting market demand.