What Is a Minimum Efficient Scale?

Minimum effective scale (MES), also known as minimum efficient scale (MES) refers to the smallest scale with average cost at or near its minimum value in the long run.

Minimum effective scale

Right!

Minimum effective scale (MES), also known as minimum efficient scale (MES)

According to the induction of the famous industrial organization scientist F.M. Scherer, the following methods are introduced: ^[1]

The market structure depends on the size of the MES and the overall market demand

The number of manufacturers that the market can accommodate is the total market demand divided by the MES.

It is not difficult to find that the minimum effective scale is the minimum output required when the unit cost reaches the minimum value. Once the size of the existing enterprise reaches this point, it will force new entrants to make a choice or enter on a larger production scale. And the risk of strong counterattacks by existing companies; either enter with a small production scale, but endure the disadvantage of high product costs.

It can be seen that under other conditions, the minimum effective scale of an industry is larger, the ratio of the minimum effective scale to the overall market is larger, and the price difference between the product before and after the potential entrant enters is greater. Therefore, the potential entrant enters The less likely it is. Therefore, under the existing conditions, enterprises can increase the minimum effective scale as much as possible, which can effectively increase the difficulty of new entrants.

As for the conditions under which a company enters a new industry with a minimum effective scale, it depends on the shape of the economies of scale curve. If the economies of scale curve is steep, the cost disadvantages of small-scale entry will be greater. In other words, the steeper the economies of scale curve, the less likely it is for small-scale entry.

Enterprises can take advantage of the minimum effective scale and work hard to increase the slope of the scale economy curve by using the learning curve to build barriers to industry entry, thereby effectively blocking potential entrants.