# Understanding Minimum Efficient Scale (MES) in Business Economics

## What Is Minimum Efficient Scale (MES)?

The minimum efficient scale (MES) is the point at which a company can produce its product for the lowest possible per-unit cost. At MES, the company can achieve the [economies of scale](https://www.investopedia.com/terms/e/economiesofscale.asp) necessary for it to compete effectively in its industry. The MES point represents a valuable balance between consumer demand, production volume, and costs, in particular those for labor and materials needed for production.

### Key Takeaways

*   The minimum efficient scale (MES) marks the production level at which a firm's average cost per unit reaches its lowest point, allowing for competitive pricing in the market.
*   Achieving MES is crucial for a business as it optimizes the balance between consumer demand, production volume, and costs, particularly labor and materials, thus enhancing efficiency.
*   Companies can reach MES through economies of scale, where increased production volumes lead to reduced per-unit costs, benefiting from both internal improvements and external industry-wide factors.
*   While MES helps to minimize costs, it can also indicate the onset of constant returns to scale, after which further production does not yield additional cost savings.
*   The dynamic nature of MES necessitates continuous monitoring and adjustments by businesses to account for changes in production factors, market demand, and external economic conditions.

## Exploring the Dynamics of Minimum Efficient Scale

For companies that produce goods, it is critical to find an optimal balance between consumer demand, [production](https://www.investopedia.com/terms/f/factors-production.asp) volume, and the costs associated with manufacturing and delivering goods.

A range of production costs go into establishing a minimum efficient scale, but its relationship to the size of its market—that is, the demand for the product—determines how many competitors can effectively operate in the market. MES identifies when a firm can produce goods cheaply enough to compete effectively in the market.

In economics, the MES is the lowest production point that will minimize the [long-run average total cost](https://www.investopedia.com/terms/l/lratc.asp) (LRATC). LRATC represents the average cost per unit of output over the [long run](https://www.investopedia.com/terms/l/longrun.asp). But remember, all inputs are variable. MES allows a company to achieve the lowest cost per unit until constant returns to scale begin.

![Minimum Efficient Scale](https://www.investopedia.com/thmb/c-sKrNltsGs-mCbXUusmG2s5pu4=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/MinimumEfficientScaleMES2-c9372fffba0a4a1ab4ab0175600afdb6.png)

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## The Relationship Between Minimum Efficient Scale and Economies of Scale

The minimum efficient scale (MES) is when the unit cost is at its lowest possible point while the company is producing its goods effectively. MES allows a company to compete more effectively since it can produce its goods efficiently at the minimum cost per unit. MES can be achieved through economies to scale.  

### Economies of Scale

Economies of scale are when a company lowers the per-unit cost of production while increasing production volume. As [production](https://www.investopedia.com/terms/m/manufacturing-production.asp) volumes rise, the total costs are spread out over the increased number of units produced.

Economies of scale can increase a companies efficiency and [profit](https://www.investopedia.com/terms/n/netincome.asp). Lower costs allow a company to offer lower prices to customers, boosting its competitive advantage.

### Internal Economies of Scale

Companies can achieve [internal economies of scale](https://www.investopedia.com/ask/answers/013015/what-are-differences-between-internal-and-external-economies-scale.asp) by making improvements internally. For example, Henry Ford improved Ford's production capability by implementing a moving [assembly line](https://www.investopedia.com/terms/a/assembly-line.asp-0). The stages of the assembly process were divided up so that each worker would have a specific task.

Before the assembly line, one worker might complete all of the tasks, which was inefficient since it involved more skilled labor, increasing [labor costs](https://www.investopedia.com/terms/c/cost-of-labor.asp). Ford increased production at a lower cost per unit by hiring unskilled labor for specific tasks.

A company's minimum efficient scale is the productivity level where its internal economies of scale create output that's as efficient and inexpensive as possible. The MES is the point on a company's long-run average cost curve where internal economies of scale have been exhausted, and constant returns have begun.  

### External Economies of Scale

Companies can also experience [external economies of scale](https://www.investopedia.com/terms/e/externaleconomiesofscale.asp), which is when an outside force improves the scale for the entire industry, such as an industry tax break. For example, the government might pass a tax break for companies that purchase new equipment, benefitting all companies within the industry.  

### Diseconomies of Scale

During constant returns, the U-shaped curve stays flat until diseconomies of scale raise costs. As companies get larger and grow more complex, they can experience higher costs and [diseconomies of scale](https://www.investopedia.com/terms/d/diseconomiesofscale.asp). This can occur when managing a larger company becomes challenging, leading to poor communication between employees and management, which increases the long-run average cost per unit.  

## Real-Life Example: Achieving Minimum Efficient Scale

  
XYZ company is a producer and manufacturer of mobile devices and was looking to improve its production capacity to increase revenue while lowering its production costs.

### Internal Economies of Scale

The company decided to purchase new equipment to replace the outdated technology and machinery. The newer technology improved the production volumes and speed at producing goods, reducing the long-run average cost per unit. Since the new equipment was more efficient, it used fewer input goods and raw materials in the production process.

Although the new technology required an outlay of cash, XYZ company achieved higher profits through internal economies to scale. The company could increase its sales since the new machinery could handle higher production volumes, and the lower input costs reduced the variable costs in producing the mobile devices.

Due to the increase in sales and production volumes, XYZ was able to buy the needed raw materials in bulk or greater quantities at a volume discount. Buying in bulk also reduced the long-run average cost per unit.  

### Minimum Efficient Scale

Eventually, minimum efficient scale kicked in, and the new technology didn't lower costs any further, even when production continued to rise. As a result, XYZ company achieved constant returns to scale, meaning the savings from internal economies to scale had been exhausted.  

## Important Considerations for Achieving Minimum Efficient Scale

When minimum efficient scale can be achieved with a small amount of production, many companies can operate efficiently and compete in an industry, such as restaurants. However, if it takes a high level of production output to achieve minimum efficient scale, fewer companies can operate in the industry, such as in the case of the telecommunications industry.  

A healthy MES consists of numerous factors, but those factors are continually shifting. They have to be recalculated frequently to reflect the changes. A business also has to keep adjusting its production levels to keep hitting the mark.

When assessing the minimum efficient scale, it's important for a business to stay abreast of changes in external variables that could affect production. These can include the costs of labor, storage, and shipping; the costs of capital; the state of the competition; customer tastes and demands; and government regulations.

## The Bottom Line

Minimum Efficient Scale (MES) is the point at which a company can produce its products at the lowest cost per unit. It's important to know the MES because it can enhance the company's competitive advantage. Achieving MES minimizes its long-run average total cost (LRATC) and indicates the maximum economies of scale, with constant returns beginning. In industries where MES requires high production levels, fewer companies can operate competitively. In others with lower MES requirements, such as the restaurant industry, more companies can effectively compete. Its important to frequently recalculate the MES due to the dynamic nature of market conditions and external variables like labor costs, regulations, and technological advancements.

> **Article Sources**
>
> 1.  History. "[Ford's assembly line starts rolling](https://www.history.com/this-day-in-history/fords-assembly-line-starts-rolling)." Accessed Oct. 03, 2021.