Minimum Efficient Scale (Mes)

Published Oct 25, 2023

Definition of Minimum Efficient Scale (MES)

Minimum Efficient Scale (MES) is the minimum level of output at which a firm can produce goods or services at the lowest average total cost in the long run. It represents the optimal scale of production for a company, where it achieves maximum efficiency and minimizes costs per unit of production.

Example

Let’s consider a manufacturing company that produces automobiles. Initially, when the company starts its operations, it may have a small scale of production. As it increases its production levels, it experiences economies of scale, where its average total cost decreases as output increases. This is because the company can spread its fixed costs (such as rent, machinery, and overhead expenses) over a larger number of units.

At a certain point, the company reaches its minimum efficient scale (MES). At this level of production, the company attains the lowest cost per unit of production. Producing more or less than this optimal level would result in higher average total costs.

For instance, suppose the company’s MES is 10,000 vehicles per year. If it produces fewer than 10,000 vehicles, its average total cost would be higher due to underutilization of resources. On the other hand, if it produces more than 10,000 vehicles, its average total cost would increase due to diminishing returns, inefficiencies, or additional costs required to increase production.

Reaching the MES allows the company to maximize its profits and competitiveness in the industry by achieving economies of scale and cost advantages compared to smaller competitors.

Why Minimum Efficient Scale Matters

Understanding the concept of Minimum Efficient Scale is crucial for businesses as it helps them determine the optimal size of their operations. By identifying the MES, companies can strategically plan their production levels and achieve cost efficiency, giving them a competitive edge in the market. Additionally, knowledge of the MES assists businesses in making informed decisions regarding capacity expansion, technological investments, and overall operational strategies to optimize efficiency and profitability.