Minimum efficient scale and market equilibrium

Try varying the minimum efficient scale and market demand, to see how many firms the market can support (assuming free entry), and what will be the prevailing price.

Although theoretically supply is perfectly elastic at the exit price, we can see that the actual equilibrium price is often above that level. The larger the scale needed to minimize average costs, the more likely it is to find a higher price in equilibrium - **even with price-taking firms and free entry**

The same graph is repeated, showing also producer surplus.

(If this is a long run and there are no sunk costs, PS also equals profit)


Both graphs assume that firms price competitively (along their marginal cost curve), even when there are very few (or zero) competitors. In practice, firms often price above marginal cost under such circumstances.