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

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.