Question

How to find the efficient Scale of a firm producing a good?

Answer 1

Minimum efficient scale is mainly related to the lowest point on the long run average cost curve and it is known as output range over which a firm will be able to accomplish productive efficiency.

Let us consider that the firm initiates quite small and perform reasonably well. With the increasing scale, there are three possibilities to its average total cost:-

Economies of scale:- This mainly happens when with increasing inputs, the average costs decreases

Diseconomies of scale:- This results when with increased inputs the average costs increases

Constant economies of scale:- this happens when AC does not change the inputs.

As the manufacturer expands or increases scale, Average Costs decrease until the optimal point: Minimum Efficient Scale. As they expand beyond that, they become inefficiently large, and face increasing Average Costs. Hence (if we assume they expanded too far, and finally settled at the Minimum Efficient Scales) they have exploited all Economies of Scale, and Diseconomies of Scale, in production.