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.

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.
Industries with a larger minimum efficient scale should have higher price-cost margins and, thus, a higher probability of firm survival.
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).
That would take output at the plant to around 200,000 units a year - something close to what's seen by many analysts as the 'Minimum Efficient Scale' needed for a car assembly plant to get its costs right down.
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.
When there are important economies of size in processing, some regions simply may not be able to supply the volume of product required to justify construction of processing facilities that operate at the minimum efficient scale. Smaller, less efficient processing plants may be available, but these raise product costs.
Minimum efficient scale ([[epsilon].sub.CY] not statistically different than zero at [alpha] = 0.05) was computed for each cost.
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).
For this reason, ventures with a high minimum efficient scale are not good grazing grounds for the nonprofit, for they will not be able to scale up sufficiently quickly to make the venture work.
Specifically, the minimum average cost, whether this occurs at a single minimum efficient scale or along some constant portion of the long-run average cost function, is found econometrically for a sample of firms.

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