Optimal Scale of Production
The optimal scale of production is the level which the firm outputs at the highest profit maximisation. (At the lowest average cost)
- In order to operate at a profit maximising output level the business will need to look at existing equipment and new equipment and see which is the best way to get the most out of them. The problem being that although you can relatively change labour quickly, i.e. get more people in. It’s quite costly for the business if they have to purchase new machinery or a larger factory in order to profit maximise.
- Likewise, the business may find the optimum output level to be higher than what the market is demanding, so even if the units are produced as cheaply as possible and for a high price, the business may end up with products it can’t sell.
Minimum efficient scale (MES) is the lowest amount the firm can produce and output to achieve all economies of scale.
