Minimum efficient scale

Key takeaways

Minimum efficient scale belongs to science; place it in that map before memorising details.
Learn the definition first, then one example that makes the definition concrete.
Connect Minimum efficient scale to a quantity you can measure, compute or draw — that is where exam questions come from.
Reproduce the core statement of Minimum efficient scale from memory before moving on to harder problems.

Reference excerpt

In industrial organization, the minimum efficient scale (MES) or efficient scale of production is the lowest point where the plant (or firm) can produce such that its long run average costs are minimized with production remaining effective. It is also the point at which the firm can achieve necessary economies of scale for it to compete effectively within the market.

Measurement of the MES Economies of scale refers to the cost advantage arising from increasing amount of production. Mathematically, it is a situation in which the firm can double its output for less than doubling the cost, which brings cost advantages. Usually, economies of scale can be represented in connection with a cost-production elasticity, Ec.

E c = Δ C / C Δ q / q . {\displaystyle Ec={\frac {\Delta C/C}{\Delta q/q}}.}

The cost-production elasticity equation can be rewritten to express the relationship between marginal cost and average cost.

E c = Δ C / C Δ q / q = Δ C / Δ q C / q = M a r g i n a l C o s t ( M C ) / A v e r a g e C o s t ( A C ) {\displaystyle Ec={\frac {\Delta C/C}{\Delta q/q}}={\frac {\Delta C/\Delta q}{C/q}}=MarginalCost(MC)/AverageCost(AC)}

The minimum efficient scale can be computed by equating average cost (AC) with marginal cost (MC): E c = M C / A C = 1. {\displaystyle Ec=MC/AC=1.} The rationale behind this is that if a firm were to produce a small number of units, its average cost per unit would be high because the bulk of the costs would come from fixed costs. But if the firm produces more units, the average cost incurred per unit will be lower as the fixed costs are spread over a larger number of units; the marginal cost is below the average cost, pulling the latter down. The efficient scale of production is then reached when the average cost is at its minimum and therefore the same as the marginal cost.

Relationship to market structure The concept of minimum efficient scale is useful in determining the likely market structure of a market. For instance, if the minimum efficient scale is small relative to the overall size of the market (demand for the good), there will be a large number of firms. The firms in this market will be likely to behave in a perfectly competitive manner due to the large number of competitors. However, if the minimum efficient scale can only be achieved at a significantly high levels of output relative to the overall size of the market, the number of firms will be small, the market is likely to be a oligopoly or monopoly market.

MES in L-shaped cost curve Modern cost theory and recent empirical studies suggest that, instead of a U-shaped curve due to the presence of diseconomies of scale, the long run average cost curve is more likely to be L-shaped. In the L-shaped cost curve, the long run cost would keep fixed with a significantly increased scale of output once the firm reaches the minimum efficient scale (MES). However, the average cost in an L-shaped curve may further decrease even though most economies of scale have been exploited when firms achieve the MES because of technical and production economies. For instance, the firm may obtain further economies of scale from skill improvement by training the employees, decentralization in management. Secondly, repair cost and scrap rate will decrease when the firm reaches a certain size. Thirdly, improvement in the firm's vertical integration, producing by a firm itself some of the materials and equipment it needs at a lower cost for its production process instead of buying them from other firms.

See also Diseconomies of scale Economies of scale Free entry Barriers to entry Socially optimal firm size Cost curve

References

Illustrations

Worked examples

Example 1 — a first encounter with Minimum efficient scale

Start with the simplest possible case. Write down what Minimum efficient scale claims or describes in one sentence, then invent the smallest concrete situation in which that sentence is true. In science, the smallest case is usually a single object, a single equation or a single measurement. Check that every symbol or term in your sentence has a meaning in that case.

Example 2 — changing one variable

Take the situation from Example 1 and change exactly one quantity: double it, halve it, or set it to zero. Predict what should happen to Minimum efficient scale before you calculate. Comparing your prediction with the result is the fastest way to find out whether you understand the idea or only the words.

Example 3 — an exam-style question

Typical questions about Minimum efficient scale ask you to (a) state it precisely, (b) apply it to given data, and (c) explain a limitation. Practise writing all three answers in under five minutes; the third part is what separates a full-mark answer from an average one.

Applications of Minimum efficient scale

In research: Minimum efficient scale appears in science research whenever the underlying quantities have to be modelled precisely. Papers usually cite it as a starting assumption and then explore where it breaks down.
In technology and industry: Engineering practice reuses Minimum efficient scale in design rules, simulations and safety margins. Knowing the idea lets you read a specification sheet and understand why the numbers look the way they do.
In the classroom: Minimum efficient scale is common in secondary-school and first-year university syllabi. It links to neighbouring topics Costs, Industrial organization, Microeconomics, so understanding it makes those chapters shorter.
In everyday life: Look for Minimum efficient scale outside the textbook — in sport, cooking, traffic, electronics or the sky above you. An example you found yourself is remembered far longer than one you were given.

How to study Minimum efficient scale in 20 minutes

Read the reference excerpt below once, without taking notes.
Close the page and write down what Minimum efficient scale means in your own words.
Compare your version with the excerpt and mark what you missed.
Work through the three examples above with pen and paper.
Explain Minimum efficient scale out loud to somebody else — or to Teacher Smith in the lgStudy chat.

Frequently asked questions

What is Minimum efficient scale in simple terms?

In industrial organization, the minimum efficient scale (MES) or efficient scale of production is the lowest point where the plant (or firm) can produce such that its long run average costs are minimized with production remaining effective. It is also the point at which the firm can achieve necessa…

Why does Minimum efficient scale matter?

Because it connects several science ideas at once: it gives you a definition you can apply, a quantity you can calculate, and a way to check whether a result is plausible.

How should I study Minimum efficient scale?

Read the excerpt, restate it from memory, then work through the examples and applications listed on this page. The five-step study plan above takes about twenty minutes.

What does this page cover?

It gives you a compact reference excerpt plus original lgStudy explanations, examples, applications and study material on Minimum efficient scale.