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Minimum efficient scale is the smallest amount of production a firm can achieve while still taking full advantage of economies of scale.

A firm achieves economies of scale when the more goods it produces, the lower its per-unit cost is. Internal economies of scale could be a firm’s staff or technology that lets it boost production while cutting costs. A company’s minimum efficient scale is the productivity level where its internal economies of scale create output that’s as efficient and inexpensive as possible.

The minimum efficient scale is the point on a business’s long-run average cost curve where economies of scale are exhausted and constant returns begin. The U-shaped curve remains flat until diseconomies of scale kick in, and costs rise with output.

When minimum efficient scale is small, many firms can operate efficiently in an industry. Retail businesses and restaurants are good examples. But if it takes a high level of output to achieve minimum efficient scale, few firms operate in the industry. Telecommunications is one example.

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