The Minimum Efficient Scale (MES) is the lowest level of output at which a company can achieve production efficiency.

In the long run, a firm can choose the size of their factory. The can have a really small factory, a really big factory, or anything in between. The possibilities for the size of a factory are endless. If each possible size factory were plotted with a short term curve, the long term curve would envelope the curves. The long term curve will decrease when it is experiencing economies to scale, then it will level off. Next, it will increase, experiencing diseconomies to scale. When it levels off, it is experiencing constant economies to scale. MES is the production of a good at the lowest possible opportunity cost. It is not possible to produce a good at any lower cost than at MES. Firms want to produce at the Minimum Efficient Scale because then they producing most efficiently and there is no possible way to produce better.
For MES to occur in a firm, it means that you are producing and getting the most out of everything you are putting into the firm, if you choose the firm size correctly. Firms want to produce at this point because it means that they are producing the right amount of output for the least amount of money, while experiencing production efficiency with their specific firm size. MES for different companies varies greatly. For example, Starbucks for a long time was achieving production efficiency but because the number of firms that they have, they have started experiencing diseconomies of scale. Because they have the amount of firms they have, it is not helping them in the long run. They are producing too much output to control and produce efficiently and this is hurting them. They can't pay attention to all of the other Starbucks branches so they are not operating under the appropriate size firm. When a company has the correct size firm to produce the exact amount of output to obtain the lowest average costs in the long run, usually they will experience increasing returns to scale. As a firm increases in size, generally this will mean they were rather successful and needed an expansion to experience increasing returns to scale. This also means that they will most likely be producing more and if it is successful and they are aware of MES, then their average total costs will decrease. If they become to large, again, they will experience an increase in average total costs. When considering a firm, they must be away and prepare to produce at the minimum efficient scale, choosing the proper size firm for their good and output.


external image lrac.gif
The y-axis shows the output. the MES would be in the constant returns to scale section, at the lowest output (the dashed line on the left). This would represent the smallest company that is efficient.

This video is a commercial for Dunder Mifflin. Dunder Mifflin would represent a small paper company. Staples, or Office Max would be an example of a large paper company. If a company the size of Dunder Mifflin and a company the size of Staples were both productively efficient, meaning they both produced the right amount of paper (total costs are minimized), then Dunder Mifflin would be at the Minimum Efficient Scale because it is the smallest level of output.

Links For Additional Information:
http://en.wikipedia.org/wiki/Minimum_Efficient_Scale
http://tutor2u.net/economics/content/topics/buseconomics/mes.htm
http://www.investopedia.com/terms/m/minimum_efficiency_scale.asp
http://economicobjectorvism.wordpress.com/2007/07/27/howto-minimum-efficient-scale/



Question:
Is MES reached during economies to scale, constant returns to scale, or diseconomies to scale?

Answer: Constant Returns to Scale