Minimum efficient scale facts for kids

The minimum efficient scale (MES) is the smallest size a factory or business needs to be to make its products at the lowest possible cost per item. Imagine a company that makes toys. The MES is the number of toys it needs to produce each day to get the cheapest cost for each toy.

This idea is important because it helps us understand how many companies can exist in an industry. If the MES is very large, only a few big companies might be able to survive. If it's small, many smaller companies can compete.

What is Minimum Efficient Scale?

The minimum efficient scale, or MES, is the point where a company's long-term average costs are as low as they can get. Think of it like this:

• Costs: These are all the expenses a business has, like paying for materials, machines, rent for the factory, and workers' salaries.
• Average Cost: This is the total cost divided by the number of items produced. For example, if it costs $100 to make 10 toys, the average cost is $10 per toy.
• Long-Term: This means the company has enough time to change anything it wants, like building a bigger factory or buying more machines.

At first, as a company makes more products, its average cost per item usually goes down. This is because it can use its machines and workers more efficiently. But at some point, making even more products might start to increase the average cost again (maybe due to needing more managers or becoming too complex). The MES is the sweet spot where the average cost is at its lowest.

Why is MES Important for Businesses?

Understanding the minimum efficient scale helps businesses make smart decisions about their size and production levels.

• Deciding Factory Size: If a company wants to build a new factory, it will aim for a size that allows it to produce at or above the MES. This helps them keep their costs low and be competitive.
• Planning Production: Companies try to produce at a level close to their MES to avoid wasting resources or having higher costs than necessary.
• Entering a Market: A new company looking to join an industry needs to know if it can reach the MES. If it can't, it might struggle to compete with bigger, more efficient businesses.

MES and Market Structure

The size of the minimum efficient scale compared to the total demand in a market can greatly affect how many companies are in that market. This is called market structure.

• Many Small Businesses: If the MES is small compared to the total demand for a product, many small businesses can operate efficiently. For example, local bakeries or coffee shops often have a relatively small MES. This means many of them can exist in a city.
• Few Large Businesses: If the MES is very large, meaning a company needs to produce a huge amount to be efficient, then only a few large companies might be able to survive. Industries like car manufacturing or airplane production have a very high MES. It would be too expensive for many small companies to build the massive factories needed to produce cars cheaply. This can lead to an Oligopoly (a market dominated by a few large firms) or even a Monopoly (a market with only one firm).

Understanding the Cost Curve

Economists often use a graph called the long-run average cost curve to show the MES.

• This curve typically looks like a "U" shape.
• As production increases, the average cost per item goes down (the left side of the "U"). This is due to things like buying materials in bulk or using specialized machines.
• At the very bottom of the "U" is the minimum efficient scale. This is where the average cost is the lowest.
• If production goes beyond the MES, the average cost might start to rise again (the right side of the "U"). This can happen if a company becomes too big to manage efficiently, or if it faces higher costs for resources.

Images for kids

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  cost-production elasticity

See also

In Spanish: Escala mínima eficiente para niños