Minimum Efficient Scale Essay Example | Topics and Well Written Essays - 1250 words

Minimum Efficient Scale - Essay Example The MES is hardly ever a solitary output - more likely it is a range of production levels where standard cost is minimized where the firm achieves regular returns to scale. It varies from industry to industry depending on the type of the cost structure in a particular segment of the market. When the proportion of fixed to variable costs is very elevated, there is huge potential for dropping the average cost of production. The minimum efficient scale may be expressed as a variety of production standards, but its connection with the whole market size or demand will conclude how many competitors can successfully function in the market. If the minimum efficient scale is comparatively diminutive compared to total market size many companies can survive in the same space for example computer software companies. In other industries where the minimum efficient scale is quite large due to high fixed costs, only a few major players dominate the market place for example telecom and other basic materials. There is also likely to be enormous potential to take advantage of technical economies of scale. As a consequence the MES may be a high quantity of entire market demand. There may be an opportunity merely for single business to completely exploit the economies of scale obtainable in the industry. It is presumed for a natural monopoly that the long-run average cost curve falls constantly over a very great range of output. This is illustrated in the diagram below. Companies are able to exploit the market when the range of their minimum efficiency scale is high as this applies a barrier to entry. The higher the barriers to entry, the greater the ability of established firms to raise price above the long run average costs without letting the new firms enter the market this includes foreign competition too. Although production cost barriers are faced by both local and foreign companies, the foreigners face an additional barrier of tariffs levied by the government. As the manufacturers expand their scale of production, average costs decrease to minimum efficient scale that is to the optimal point. As they expand further than that, they become incompetently large, and face increasing average costs. Hence if we assume they increased too far, and finally settled at the minimum efficient scales they have oppressed all Economies of Scale, and Diseconomies of Scale, in manufacturing. Big firms can have lesser per-unit costs due to purchasing at bulk discounts example parts, indemnity, real estate, marketing, etc. and can also bound competition by buying out competitors, setting proprietary industry values. Looking at further examples, an automobile maker can buy millions of tons of steel at one point for use in forming engine blocks and store it for an indefinite period, if this will get a superior price. On the other hand, a florist can't buy millions of tons of matured flowers to put up for sale as they will shrivel before they are sold. This results in disparate interpretations of economies of scales for diverse types of companies. The size of a business may also alter over time, as industry and marketplace circumstances change. If a dealer finds a way to produce