minimum efficient scale


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minimum efficient scale

see ECONOMIES OF SCALE.
Minimum efficient scaleclick for a larger image
Fig. 122 Minimum efficient scale.

minimum efficient scale

the point on the firm's long-run AVERAGE COST curve at which ECONOMIES OF SCALE are exhausted and constant returns to scale begin.

In the theory of costs, the long-run average cost is conventionally depicted as being U-shaped, with economies of scale serving to reduce average cost as output increases to begin with, but then DISECONOMIES OF SCALE set in and average cost rises as output increases. Statistical studies suggest, however, that for many industries long-run average cost curves are L-shaped, as shown in Fig. 122.

In industries where the minimum efficient scale is large relative to the total size of the market, we would expect to find high degrees of SELLER CONCENTRATION, for the market may support only a few firms of minimum efficient scale size. The potential cost disadvantage to firms seeking to enter a market on a small scale vis-à-vis large established firms can also serve as a BARRIER TO ENTRY in certain industries. See NATURAL MONOPOLY, FLEXIBLE MANUFACTURING SYSTEM.

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