How to Calculate Minimum Efficient Scale
Minimum efficient scale is the smallest output where long-run average total cost reaches its minimum, and market quantity divided by that scale gives how many firms fit at lowest cost.
The Minimum Efficient Scale formula
Calculator
Enter minimum efficient scale, market size and a smaller firm's costs to see how many firms fit and what staying small costs.
Smallest output where long-run average total cost reaches its minimum.
Total demand at a price near that lowest average cost.
A producer sitting below efficient scale.
Cost per unit at that smaller output.
Cost per unit at minimum efficient scale.
Market quantity divided by efficient scale leaves room for about 10 firms all producing at the lowest possible cost.
- MES as a share of the market
- 10%
- Shortfall below efficient scale
- 3,000
- Unit cost penalty below MES
- $3
- Cost penalty per period
- $15,000
- Structure this points to
- Room for many firms
One efficient plant covers 10% of everything the market buys.
The smaller firm produces 3,000 units less than the scale it would need to reach minimum cost.
Every unit it makes costs $3 more than the same unit made at efficient scale.
Across its whole output the disadvantage comes to $15,000, which is what it forfeits by staying small.
Cost curves and market size together set how many sellers a market can hold, which is why the same demand supports many firms in one industry and one in another.
How to calculate Minimum Efficient Scale, step by step
- 1List long-run average total cost by output. Each output level assumes the plant size that makes it cheapest, since every input can vary in the long run.
- 2Find the lowest cost per unit. Read down the column for the smallest figure. That value is the lowest cost the technology allows, whatever scale a firm chooses.
- 3Take the smallest output that reaches it. That output is minimum efficient scale. When the curve flattens rather than turning up, MES sits where the flat stretch begins, not at its far end.
- 4Divide market quantity by MES. The answer is roughly how many firms could all produce at the lowest possible cost, which is the link between cost curves and market structure.
- 5Read the structure off that number. A large answer means many efficient competitors can coexist, a small one means only a few fit, and an answer below one means a single firm supplies the whole market more cheaply than two could.
Worked example: Minimum Efficient Scale
A plant's long-run average total cost falls to $20 a unit at 8,000 units a year and stays flat out to 30,000, so minimum efficient scale is 8,000. The market buys 80,000 units a year at that price, so 80,000 ÷ 8,000 = 10 firms could all operate at the lowest possible cost and each efficient plant covers 10% of the market, which points to a competitive structure. A firm stuck at 5,000 units, where long-run ATC is $23, sits 3,000 units short of efficient scale and carries a $3 disadvantage on every unit, or 3 × 5,000 = $15,000 a year, which is the pressure that makes it grow or leave.
Minimum Efficient Scale questions
How does minimum efficient scale decide market structure?
Divide the quantity the market buys by minimum efficient scale. A small efficient scale relative to demand leaves room for many firms at lowest cost, so the market looks competitive; a large one leaves room for a handful, which is the oligopoly case; and when one efficient plant could serve everyone, the result is a natural monopoly.
Is minimum efficient scale the output a firm should produce?
No. Profit is maximized where marginal revenue equals marginal cost, which can land above or below efficient scale. A firm sitting exactly at minimum efficient scale can still lose money, because if the price is under that lowest average total cost, the cheapest possible production is still not cheap enough.
What if the long-run cost curve is flat over a wide range?
Then every output on the flat stretch shares the same lowest cost, and minimum efficient scale is where that stretch starts. Firms of very different sizes can compete on equal cost terms, which is why some industries contain both regional and national producers.
How is minimum efficient scale different from economies of scale?
Economies of scale describe the falling part of the long-run average cost curve, while minimum efficient scale is the output where that fall ends. One names the process, the other names the point where the process stops paying.
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