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Minimum Efficient Scale

The minimum efficient scale (MES) is the lowest point on a cost curve at which a company can produce its product at a competitive price and achieve economies of scale necessary to compete effectively in its industry. At the MES, a firm can produce goods cheaply enough to offer them at a competitive price while minimizing long-run average total cost. In 1970, General Motors achieved a maximum MES through automated production, enjoyed economies of scale, and gained up to 60% of the US automobile market. The MES depends on an industry's costs of production and impacts the number of firms an industry can support.

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158 views

Minimum Efficient Scale

The minimum efficient scale (MES) is the lowest point on a cost curve at which a company can produce its product at a competitive price and achieve economies of scale necessary to compete effectively in its industry. At the MES, a firm can produce goods cheaply enough to offer them at a competitive price while minimizing long-run average total cost. In 1970, General Motors achieved a maximum MES through automated production, enjoyed economies of scale, and gained up to 60% of the US automobile market. The MES depends on an industry's costs of production and impacts the number of firms an industry can support.

Uploaded by

Johnlene Louise Saiton
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Minimum Efficient Scale (MES)

The minimum efficient scale (MES) is the lowest point on a cost curve at which a company can
produce its product at a competitive price. At the MES point, the company can achieve
the economies of scale necessary for it to compete effectively in its industry.

In other words, MES seeks to identify the point at which a firm can produce its goods cheaply
enough to offer them at a competitive price in the marketplace. In economics, the MES is the
lowest production point that will minimize long-run average total cost (LRATC). LRATC
represents the average cost per unit of output over the long run. But remember, all inputs are
variable.

Real World Example of Minimum Efficient Scale


Since the 1950s, U.S. families had grown increasingly dependent on the automobile, and many
families owned more than one car. General Motors Company (NYSE: GM) dominated the
market. Production was efficient and exports were plentiful.

In 1970, GM switched its assembly methods from mostly manual to mostly automated
production. Consumer demand, increased production, and low-cost materials all created
economies of scale in GM's favor, and the company achieved what could be called a maximum
minimum efficient scale. In the years that followed, GM enjoyed a share of the U.S. automobile
market as high as 60%.

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

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