minimum efficient scale

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minimum efficient 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.

References in periodicals archive ?
Minimum Efficient Scale (MES): Gorecki (1975), Kessides (1986) and Saikia (1997) explored the role of MES in determining entry but did not find it to be a significant deterrent.
Entrepreneurs, executives and stockholders face similar uncertainty as disruptive technologies change the rules of the game by reducing entry barriers and lowering the minimum efficient scale (the smallest amount a company must produce while still taking full advantage of economies of scale).
Despite sagging customer demand, the company still intends to retain the business unit at a minimum efficient scale, emphasizing that it won't make its second cut on the remaining workforce, but will keep vying for contract orders for tablet PCs in the future, though such products contribute only a few to its overall sales revenue for the moment.
For all platform businesses the minimum efficient scale is very large.
COLEP lowers the minimum efficient scale [MES] by integrating the different stages of the value chain, although it is evident that the upstream activities have higher minimum efficient scales than the downstream activities.
It is worthwhile to point out that this is the case no matter what the size of market demand relative to minimum efficient scale is.
There is wide variation in minimum efficient scale estimates in the literature.
One of the implications of this "tariff-limit pricing behavior," in which firms set prices at the international market price plus the domestic tariff regardless of their marginal costs, is that, in equilibrium, it may be optimal for firms to produce to the left of their point of minimum efficient scale (MES).
In other words, the minimum efficient scale has been reached when the average cost per ton of disposed waste is no longer decreasing.
This would be reflected in the shape of the average cost curves and the determination of the minimum efficient scale.
Fine holds the concentration of the ownership of the rights to Britain's coal in the hands of a relatively few large landowners primarily responsible for the coal masters' failure to concentrate production on mines of minimum efficient scale.
Compare that to a recent estimate that the minimum efficient scale of a new integrated steel facility is 6 million tons.

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