If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:6:07
AP.MICRO:
PRD‑1 (EU)
,
PRD‑1.A (LO)
,
PRD‑1.A.12 (EK)

Video transcript

in this video we're going to think about the concept of minimum efficient scale and then how that impacts market concentration and we're going to make sure we understand what both of these ideas are so first of all minimum efficient scale you can view it as the smallest scale at which we stopped getting economies of scale or another way of thinking about it is the minimum scale at which we are no longer our long-run average total cost curve is declining so in this example let's see it when we talk about our taco trucks when we were at about 80 units we're not at minimum efficient scale yet because our long-run average total cost curve is still declining as we add more and more and more units we're getting economies of scale all the way until at least in this example it looks like our long-run average total cost curve stops declining around 200 units so in this example that would be our minimum efficient scale which is sometimes abbreviated as M e s and one way to think about it is this is the minimum scale at which an operation needs to run at in order to be very competitive in order to be truly efficient out there in the market because you can imagine if some operators are able to achieve minimum efficient scale of let's say getting to the 200 tacos a day while others are not let's say they're only able to stay at 100 tacos per day and if the market were to get very competitive and the price of a taco were to go down to say 55 cents per taco the people who are at minimum efficient scale could still operate and still make money while the people who are not at minimum efficient scale well they're not going to be able to participate in the market and most well-functioning markets it gets quite competitive and so economists like to think about what the minimum efficient scale is and compare that to the entire market size now what do we mean by market size well it depends on how you are defining the market in our example of our taco trucks it might be the market for tacos market or tacos in our city and of course you can define different markets you could define it as the market for food trucks in our city you could define it as the market for tacos in our state or our country but let's say if we were to say the market for tacos in our city and let's say that that market is ten thousand ten thousand tacos per day well in this reality our minimum efficient scale is 200 tacos per day and it's a very small fraction of the total market and so that means that you could have many different competitors each at that minimum efficient scale so they're able to produce tacos at that 50 cents per taco and because of that you are likely to have many competitors so when this when our minimum efficient scale is a small fraction of the total market that is going to lead to fragmentation so here we're going to have a fragmented fragmented market so if this circle were to represent the 10,000 tacos that are sold per day if you're able to have a lot of competitors each operating at minimum efficient scale in fact there's no real advantage to operating above minimum efficient scale because then you start getting dis economies to scale well then you are going to have maybe 50 competitors who are splitting this market so I won't take the trouble of making us into 50 different chunks the one competitor has that part of the market other competitor has that part of the market other competitor has that part of the market and you could imagine we're going to have this market fragmented into maybe 50 different players and so that's why it's called a very fragmented market but let's say that the minimum efficient scale was pretty close to the market size so let's say instead of a market for ten thousand tacos per day let's say that the market in our city is for four hundred four hundred tacos per day well then the market is going to be smaller like this and so then it makes sense for if someone's able to get to the minimum efficient scale they can take up a lot of the market in fact they could take up half of the market so this type of market might only be able to really support two players in this market so this is considered to be a far more concentrated concentrated market and you could go to a reality where your minimum efficient scale is at the market size or is even larger than the market size so let's say that the market size is not 400 tacos per day but let's say we had to talk a market let's say we had a market of 195 tacos per day per day well in that world whoever can get to 195 tacos is going to produce most efficiently they're not even getting to the minimum efficient scale but the more the closer that you can get to that number you're going to have the lowest average total long-run average total cost of production and so it's going to be very hard for anyone else to compete with you especially if you're taking up most of the market no one else is going to be able to get to scale so they're going to be operating out here on the long-run average total cost curve and so in that world you might only have one player and when you have one player where the market dynamics make it so that it is actually efficient for only one player this is sometimes referred to as a natural monopoly there's other dynamics that could lead to a natural monopoly but one way to think about it is is if you keep getting economies of scale even up to the market size well then whoever can get to that market size first is going to be the most efficient producer