The Minimum Efficient Scale Is

In industrial organization, the minimum efficient calibration (MES) or efficient calibration of production is the lowest point where the institute (or firm) can produce such that its long run average costs are minimized. It is also the point at which the firm can achieve necessary economies of scale for it to compete finer within the market.^[1]

Measurement of the MES [edit]

Economies of scale refers to the price reward arise from increasing amount of product. Mathematically, it is a situation in which the firm tin double its output for less than doubling the cost, which brings toll advantages. Normally, economies of scale tin exist represented in connection with a cost-product elasticity, Eastwardc .^[ii]

Ec={\frac {\Delta C/C}{\Delta q/q}}.

cost-product elasticity

The toll-product elasticity equation tin can be rewritten to express the relationship between marginal cost and average cost.

Ec={\frac {\Delta C/C}{\Delta q/q}}={\frac {\Delta C/\Delta q}{C/q}}=MarginalCost(MC)/AverageCost(Air-conditioning)

The minimum efficient scale tin can exist computed by equating average cost (Air-conditioning) with marginal cost (MC).i.e. $Ec=MC/AC=1.$ . The rationale behind this is that if a firm were to produce a small-scale number of units, its average toll per unit would be high because the bulk of the costs would come from stock-still costs. But if the business firm produces more units, the average price incurred per unit volition be lower as the fixed costs are spread over a larger number of units; the marginal toll is below the average cost, pulling the latter down. The efficient scale of production is then reached when the average cost is at its minimum and therefore the aforementioned every bit the marginal cost.

Relationship to market structure [edit]

The concept of minimum efficient scale is useful in determining the likely market structure of a market. For case, if the minimum efficient calibration is pocket-sized relative to the overall size of the market (demand for the good), there will be a large number of firms. The firms in this market will be likely to bear in a perfectly competitive fashion due to the big number of competitors.^[3] However, if the minimum efficient calibration tin only exist achieved at a significantly high levels of output relative to the overall size of the market place, the number of firms will be small, the market place is probable to exist a oligopoly or monopoly market.

MES in L-shaped cost curve [edit]

50-shaped long run average cost curve

Modernistic cost theory and contempo empirical studies^[4] ^[5] suggest that, instead of a U-shaped curve due to the presence of diseconomies of scale, the long run average cost bend is more likely to be L-shaped. In the L-shaped cost curve, the long run toll would go on fixed with a significantly increased scale of output one time the firm reaches the minimum efficient scale (MES).

However, the average cost in an Fifty-shaped curve may farther decrease even though virtually economies of scale have been exploited when firms achieve the MES because of technical and production economies. For instance, the firm may obtain farther economies of scale from skill improvement past training the employees, decentralization in management. Secondly, repair cost and scrap rate will subtract when the firm reaches a certain size. Thirdly, comeback in the business firm'due south vertical integration, producing by a firm itself some of the materials and equipment information technology needs at a lower cost for its product process instead of buying them from other firms.

Run into also [edit]

Diseconomies of scale
Economies of scale
Complimentary entry
Barriers to entry
Socially optimal firm size
Cost curve

References [edit]

^ Besanko, David; Dranove, David; Shanley, Mark (2015). Economics of strategy (7th ed.). Hoboken: Wiley. ISBN9781119042310.
^ Pindyck, Robert; Rubinfeld, Daniel (2017). Microeconomics, Global Edition (9th ed.). Harlow, U.k.: Pearson. ISBN978-1292213378.
^ Carlton D. and Perloff M.: "Modern Industrial Organization" Fourth Edition, 2005
^ Johnston, J. (1952-02-01). "Statistical Cost Functions in Electricity Supply". Oxford Economic Papers. iv: 68-105. doi:10.1093/oxfordjournals.oep.a042200.
^ Dean, Joel (1937-03-01). "Statistical Cost Curves". Journal of the American Statistical Association. 32 (197): 83-89. doi:10.1080/01621459.1937.10502751.