Minimum efficient scale
Also called: MES · Topic: Production Function, Returns and Costs · NCERT: Beyond NCERT
Meaning
Minimum efficient scale (MES) is the lowest output at which a firm's long-run average cost reaches its minimum. Below MES, the firm pays a higher cost per unit than larger rivals. MES compared with the size of the market decides how many firms an industry can efficiently support. If MES is close to the size of the whole market, only one firm can produce at the lowest cost. This is called a natural monopoly.
Example
Many Indian MSMEs stay small and never reach MES. The Economic Survey 2018-19 called this "dwarfism" in its chapter "Nourishing Dwarfs to become Giants". The PLI schemes announced in 2020-21 aim to help firms reach global scale.
Don't confuse with
- Economies of scale: the general fall in LRAC as output grows. MES is the specific output level where that fall ends.
Related concepts
- Long run average cost
- Long run marginal cost
- Economies of scale
- Internal economies of scale
- External economies of scale
- Diseconomies of scale
- Economies of scope