Minimum Efficient Scale, Tarrifs of Automobile Industries

In: Business and Management

Submitted By edclng
Words 1204
Pages 5
Box4.4 Case Studies and Applications p111-112
Minimum efficient scale
1) Why might a firm operating with one plant achieve MEPS and yet not be large enough to achieve MES?

A firm that operates with one plant may only achieve minimum efficient plant size (MEPS) instead of minimum efficient scale (MES) in accordance to the size of the firm. This can be reasoned that the individual plant is not large enough comparing to a firm that operates with several plants. An individual factory can be categorized as a Short-run production, since it is only one factory, expanding the factory or building more factories will be considered as Long-run. Thus, the individual factory (one plant) of the firm is a fixed factor and the inputs are variable factors. The only way to expand firm production is to increase the outputs by increasing variable factors such as materials and labour. This process will lead to a similar theory of “economies of scale” consumption in the short-run period. MES will be relatively larger than MEPS in terms of production of outputs through this process. The example below will show why one plant cannot achieve MES, but instead only MEPS.

Take the case of an Orange juice production firm with a single factory:
The Variable factors include the number of workers and oranges (input), and the fixed factor is the factory itself. In order to increase output, the firm needs to increase the number of workers and oranges. The “economies of scale” will occur when oranges from farms charges the firm a cheaper price (or discount) when the firm demands more oranges and when workers become more familiar with the environment and machines in the factory. However, since the factory has limited amount of workers and oranges it can hold, it will lead to the law of diminishing returns as it cannot produce more and more output. (When the SRAC curve rises it does not indicate…...

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