Minimum Efficient Scale

Since maria thinks tt i shld know more abt minimum efficient scale, i shall do an entry on it.

Firstly, whats minimum efficient scale? The minimum efficient scale (MES) is the output for a business in the long run where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the long run average total cost curve and is also known as the output of long run productive efficiency. Hence, the MES achieves production of a good at the lowest possible opportunity cost, which means its not possible to produce a good at any lower cost than at the minimum efficient scale. At this quantity the production involves foregoing the least amount of other goods. The MES is rarely a single output - more likely its a range of output levels where average cost is minimised where the firm achieves constant returns to scale. In other words, while minimum efficient scale is often specified in terms of "the quantity of production," it need not be a single quantity. It could be a range of output. The reason is tt long-run average cost is subject to two influences, economies of scale (and increasing returns to scale) for small production levels and diseconomies of scale (and decreasing returns to scale) for larger production levels. Therefore, the MES is the production quantity or range of quantities in which these two influences balance out or, in which the economies of scale have been exhausted, but the diseconomies of scale have not yet surfaced. This could be a single quantity, a turning point on the long-run average cost curve, or it could be a range of output. The MES will vary from industry to industry depending on the nature of the cost structure in a particular sector of the economy. When the ratio of fixed to variable costs is very high, there is great potential for reducing the average cost of production.


The graph below presents the long-run average cost curve for the production of Wacky Willy Stuffed Amigos (those cute and cuddly armadillos, tarantulas, and scorpions). The negatively-sloped range for relatively small quantities of output is the result of economies of scale. Over this range, workers and machinery become increasingly specialized, volume discounts r given on electricity prices, auxiliary activities begin springing up around the Wacky Willy factory, and markets r emerging for some of the bi-products. As the scale of production increases, these economies of scale r exhausted and diseconomies take hold. This is reflected in the positively-sloped portion of the long-run average cost curve. Diseconomies of scale result cos the factory is so big, with so many workers and levels of management, tt its increasingly difficult to manage. Moreover, bcos The Wacky Willy Company is the primary employer in Shady Valley, labor prices rise as Wacky Willy employment increases. The minimum point on the long-run average cost curve occurs where economies of scale give way to diseconomies, and a production quantity of 300. This is the MES for the production of Wacky Willy Stuffed Amigos. As far as the opportunity cost of foregone production is concerned, Wacky Willy cannot produced Stuffed Amigos at a lower per unit cost than at this MES.


The extent to which economies of scale can be exploited in the long run will vary btwn different industries. In some the minimum efficient scale is reached at a relatively low level of output. The internal scale economies r limited and there is room for many separate businesses to achieve the MES. With a natural monopoly, the cost structure is different. For eg, in industries where massive networks or national distribution channels r required, the overhead costs relative to the running costs r likely to be high. Theres also likely to be great potential to exploit technical economies of scale. As a result the MES may be a high proportion of total market demand. There may be room only for one business to fully exploit the economies of scale available in the industry. We assume for a natural monopoly that the long-run average cost curve falls continuously over a very large range of output. This is shown in the diagram below.

Ok, tts abt it. Pls feel free to add on whatever i have missed out or correct any mistakes made =)