Question

Suppose fast-food restaurants face a relatively low minimum efficient scale (MES) and diseconomies of scale over a large range of their output levels. Based on these long-run cost conditions, discuss what you think this means for the structure of the fast-food restaurant industry in terms of the number and scale of restaurants?

Answer 1

A firms Minimum Efficient Scale or MES is the lowest scale necessary for it to achieve the economies of scale required to operate efficiently and competitively in its industry.No further economies of scale can be achieved beyond it.

When MES is low,relate to the size of the whole industry,a large number of firms can operate efficiently, as with case of corner shops and restaurants.Fast food market is competitive and each firm has a monopoly of its own.These are a blend of competition and monopoly means monopolistic competition.Such a market structure contain morethan a few firms,each of them offer different product with different price.Thier product differenciation applied by the restaurants are intems of food ingradients,pleasing customer services,combo offers and innovations too.They incurred extra selling cost for advertisements and sales promotion activities.So thier total cost include production cost plus selling cost This phenomenon uplift thier average cost curve a little up.