Minimum Efficient Scale

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What is the 'Minimum Efficient Scale'

The smallest amount of production a company can achieve while still taking full advantage of economies of scale with regards to supplies and costs. In classical economics, the minimum efficient scale is defined as the lowest production point at which long-run total average costs (LRATC) are minimized.

The minimum efficient scale may be expressed as a range of production values, but its relationship to the total market size or demand will determine how many competitors can effectively operate in the market.

 

BREAKING DOWN 'Minimum Efficient Scale'

If the minimum efficient scale is relatively small compared to total market size (a good example would be computer software), many companies can exist in the same space. In other industries - such as telecom and basic materials - the minimum efficiency scale is quite large due to the high ratio of fixed costs to variable costs. In these types of industries, only a few major players tend to dominate the space.

 

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