Question

Explain the expression “minimum efficient scale” with the aid of a diagram. Provide an example of an industry that you would expect to exhibit minimum efficient scale and explain why.

Answer 1

A firm's minimum efficient scale is the lowest scale necessary to achieve economies of scale required to operate efficiently and competitively in its industry.

When the 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 retail businesses like restaurants etc.

If minimum efficient scale can be achieved at a very high level of output relative to the whole industry, the number of firms will be smaller which is a case of a natural monopoly such as water, gas electricity etc.