Minimum efficient scale

Minimum Efficient Scale

A firm’s minimum efficient scale (MES) is the lowest scale necessary for it to achieve the economies of scale required to operate efficiently and competitively in its industry. No further significant economies of scale can be achieved beyond this scale.

Minimum efficient scale affects the number of firms that can operate in a market, and the structure of markets.

When minimum efficient scale is low, relative to the size of the whole industry, a large number of firms can operate efficiently, as in the case of most retail businesses, like corner shops and restaurants.

However, if minimum efficient scale can only be achieved at very high levels of output relative to the whole industry, the number of firms in the industry will be small. This is the case with natural monopolies, such as water, gas, and electricity supply.