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Chapter 11: Problem 2

What is minimum efficient scale? What is likely to happen in the long run to firms that do not reach minimum efficient scale?

Short Answer

Expert verified
Minimum Efficient Scale (MES) is the lowest level of output at which a firm can minimize its long run average cost. If a company does not reach MES, it is likely the company would struggle to survive in the long run due to its inability to compete on pricing as a result of higher production costs.

Step by step solution

01

Defining Minimum Efficient Scale

The minimum efficient scale (MES) can be defined as the smallest amount of production a firm can achieve while still taking full advantage of economies of scale in relation to its costs. In other words, it's the level of production where the cost per unit is minimized.
02

Possible Long term Implications

A firm that does not reach the minimum efficient scale would still be producing at a higher cost per unit in the long run as compared to a firm that has achieved MES. This is because they are not fully utilizing all the available economies of scale.
03

Effect on Survival of the Businesses

In a highly competitive market, these firms may not survive in the long run because they will not be able to compete effectively with firms that achieved a minimum efficient scale. The reason is, these firms will be able to offer goods at a lower price due to lower production costs, thus gaining more market share. As a result, businesses not achieving MES may experience decreased profits, which could eventually lead to closure.

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Most popular questions from this chapter

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