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Business Economics
(a) Market/Demand Condition
Business Economics
Business Economics
Minimum Efficient
Scale (MES)
.
Q
• Scale economies: As scale of operation increases, average costs fall
Scale diseconomies : As scale of operation rises, average costs rise
MES : Optimum scale of operation where full economies are exploited
LRAC : Envelope of SRAC curves
EPGDIB 2019-20
A .
.
F
B
.
. .
E
C .
D
Q* Q
When economies of scale exist (A,B,C) and market demand is expanding, in the short
run, it is better for firms to have bigger plants and operate under excess capacity
conditions.
When diseconomies of scale exist and market demand is expanding, in the short run, it
is better for firms to have smaller plants and operate in the rising part of SRAC curve.
EPGDIB 2019-20