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October 23, 2014 

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AGGREGATE SUPPLY: The total (or aggregate) real production of final goods and services available in the domestic economy at a range of price levels, during a given time period. Aggregate supply (AS) is one half of the aggregate market analysis; the other half is aggregate demand. Aggregate supply, relates the economy's price level, measured by the GDP price deflator, and aggregate domestic production, measured by real gross domestic product. The aggregate supply relation is generally separated into long-run aggregate supply, in which all prices and wages and flexible and all markets are in equilibrium, and short-run aggregate supply, in which some prices and wage are NOT flexible and some markets are NOT in equilibrium.

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MINIMUM EFFICIENT SCALE:

The quantity of production that places a firm at the lowest point on its long-run average cost curve. The minimum efficient scale achieves production of a good at the lowest possible opportunity cost. In other words, it is not possible to produced a good at any lower cost than at the minimum efficient scale. At this quantity the production involves foregoing the least amount of other goods.
While minimum efficient scale is often specified in terms of "the quantity of production," it need not be a single quantity. It could be a range of output. The reason is that long-run average cost is subject to two influences, economies of scale (and increasing returns to scale) for small production levels and diseconomies of scale (and decreasing returns to scale) for larger production levels.

The minimum efficient scale is the production quantity or range of quantities in which these two influences balance out. Or, another way of stating this, the minimum efficient scale is the production quantity or range of quantities in which the economies of scale have been exhausted, but the diseconomies of scale have not yet surfaced. This could be a single quantity, a turning point on the long-run average cost curve, or it could be a range of output.

Long-Run Average Cost Curve
Long-Run Average Cost Curve
The exhibit to the right presents the long-run average cost curve for the production of Wacky Willy Stuffed Amigos (those cute and cuddly armadillos, tarantulas, and scorpions). The negatively-sloped range for relatively small quantities of output is the result of economies of scale. Over this range, workers and machinery become increasingly specialized, volume discounts are given on electricity prices, auxiliary activities begin springing up around the Wacky Willy factory, and markets are emerging for some of the bi-products.

As the scale of production increases, these economies of scale are exhausted and diseconomies take hold. This is reflected in the positively-sloped portion of the long-run average cost curve. Diseconomies of scale result because the factory is so big, with so many workers and levels of management, that it is increasingly difficult to manage. Moreover, because The Wacky Willy Company is the primary employer in Shady Valley, labor prices rise as Wacky Willy employment increases.

The minimum point on the long-run average cost curve occurs where economies of scale give way to diseconomies, and a production quantity of 300. This is the minimum efficient scale for the production of Wacky Willy Stuffed Amigos. As far as the opportunity cost of foregone production is concerned, Wacky Willy cannot produced Stuffed Amigos at a lower per unit cost than at this minimum efficient scale.

<= MIDPOINT ELASTICITY FORMULAMIXED ECONOMY =>


Recommended Citation:

MINIMUM EFFICIENT SCALE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2014. [Accessed: October 23, 2014].


Check Out These Related Terms...

     | long-run total cost | long-run average cost | long-run marginal cost | economies of scale | diseconomies of scale | planning horizon |


Or For A Little Background...

     | returns to scale | increasing returns to scale | decreasing returns to scale | long-run production analysis | long-run, microeconomics | average cost | opportunity cost | efficiency |


And For Further Study...

     | long-run average cost curve, derivation | long-run, macroeconomics | average total cost curve | law of diminishing marginal returns | short-run production analysis | U-shaped cost curves | opportunity cost, production possibilities |


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