Overview
This lecture explains minimum efficient scale (MES), its impact on firm competitiveness, and how MES relates to market concentration and market structure.
Minimum Efficient Scale (MES)
- MES is the smallest production scale at which long-run average total costs stop declining.
- Firms at MES have realized all economies of scale and operate most efficiently.
- If a firm produces less than MES, it has higher average costs and is less competitive.
- MES ensures firms can remain profitable even if market prices fall, unlike less efficient competitors.
MES and Market Size
- Market size refers to total demand, e.g., all tacos sold daily in a city.
- When MES is a small fraction of total market size, many firms can operate efficiently.
- Multiple firms at MES lead to a fragmented market with many competitors.
- When MES is a large fraction of market size, only a few firms can reach MES, resulting in a concentrated market.
Market Concentration and Structure
- Fragmented markets have many competitors, each with a small market share.
- Concentrated markets have few firms, each controlling a large portion of the market.
- If MES equals or exceeds total market size, only one firm can operate efficiently, leading to a natural monopoly.
Key Terms & Definitions
- Minimum Efficient Scale (MES) — The lowest level of output at which a firm's long-run average total cost stops decreasing.
- Economies of Scale — Cost advantages obtained with increased output.
- Market Concentration — The degree to which a small number of firms control a large market share.
- Fragmented Market — A market with many small competitors.
- Natural Monopoly — A market where one firm can supply the entire market most efficiently due to high MES.
Action Items / Next Steps
- Review the relationship between MES and different market structures.
- Practice applying these concepts to other industries or example markets.