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