A competitive firm that is not at the minimum point on its LRAC curve
is not maximizing its long-run profits. A competitive firm with short-run
cost curves SRATC and MC faces a market price of The firm produces
where MC equals price and total costs are just being covered.
However, the firm’s long-run average cost curve lies below its short-run
curve at output The firm could produce output at cost by
building a larger plant so as to take advantage of economies of scale.
Profits would rise, because average total costs of would then be less
than price The firm cannot be maximizing its long-run profits at any
output below because, with any such output, average total costs can
be reduced by building a larger plant. The output is the minimum
efficient scale of the firm.
For a competitive firm to be maximizing its long-run profits, it must be producing at the
minimum point on its LRAC curve.As we saw in Chapter 8 , the level of output at which LRAC reaches a
minimum is known as the firm’s minimum efficient scale (MES). When
each firm in the industry is producing at the minimum point of its long-
run average cost curve and just covering its costs, as in Figure 9-12
p 0.
Q 0 ,
Q 0. Q 0 c 0
c 0
p 0.
Qm
Qm