Theory of the Firm - Explaining the Minimum Efficient Scale

This short topic video looks at the concept of Minimum Efficient Scale and considers it in the context of pharmaceuticals production.

Minimum efficient scale (MES) is the smallest level of output in the long run that a firm can produce while still taking advantage of internal economies of scale, resulting in the lowest possible long-run average cost (LRAC).

In some industries, the MES is very high relative to the size of market demand. In this situation, there may only be room for one or just a few firms to fully exploit the available internal economies of scale

When the MES is high, we expect to see a concentrated market such as a dominant firm monopoly, duopoly or an oligopoly.When MES is low, a competitive market is more likely