What Is Minimum Efficient Scale (MES)?

What Is Minimum Efficient Scale (MES)?

Let me explain Minimum Efficient Scale, or MES, directly to you: it's the lowest point on a company's cost curve where it can produce products at a price that keeps it competitive. At this MES point, the company hits the economies of scale needed to stand strong in its industry.

Understanding Minimum Efficient Scale

If you're running a company that makes goods, you need to find that sweet spot between what consumers want, how much you produce, and the costs of making and delivering those goods. MES considers a range of production costs, but it's tied to the market size—meaning demand for your product—which determines how many competitors can realistically survive. In essence, MES identifies where you can make your goods cheaply enough to price them competitively.

From an economics standpoint, MES is the lowest production point that cuts your long-run average total cost (LRATC), which is the average cost per unit over the long haul when all inputs vary. It lets you hit the lowest cost per unit until you start seeing constant returns to scale.

Minimum Efficient Scale and Economies of Scale

MES occurs when your unit cost is at its absolute lowest while producing effectively. This allows you to compete better because you're making goods efficiently at minimal cost per unit, often through economies of scale.

Economies of scale happen when you lower per-unit costs by ramping up production volume, spreading total costs over more units. This boosts efficiency and profit, and you might even pass savings to customers for a competitive edge.

Internal Economies of Scale

You can achieve internal economies by making changes within your company. Think of Henry Ford's assembly line: he broke down tasks so workers specialized, cutting labor costs and boosting output. Your company's MES is where these internal efficiencies max out on the long-run average cost curve, shifting to constant returns.

External Economies of Scale

External economies come from outside forces that benefit the whole industry, like a government tax break on new equipment. This scales up efficiency for everyone involved.

Diseconomies of Scale

Once you hit constant returns, costs stay flat, but as your company grows more complex, diseconomies can set in. This means higher costs from issues like poor communication, pushing up your long-run average cost per unit.

Example of Minimum Efficient Scale

Take XYZ company, a mobile device maker looking to boost revenue and cut costs. They bought new equipment to replace old tech, speeding up production and lowering per-unit costs. This internal economy allowed higher volumes with fewer inputs, plus bulk discounts on materials. Eventually, MES was reached—costs didn't drop further, leading to constant returns.

Special Considerations

When MES requires low production, many companies can thrive, like in restaurants. But high production needs mean fewer players, as in telecom. MES factors shift constantly, so recalculate often and adjust output. Keep an eye on external changes like labor costs, shipping, capital, competition, customer demands, and regulations to maintain your edge.