Explain how successful firms like McDonald’s eventually meet their ideal minimum efficient scale or MES.
The correct answer and explanation is:
Correct Answer:
Successful firms like McDonald’s eventually meet their ideal minimum efficient scale (MES) by expanding production and operations to a level where average costs are minimized. Through economies of scale, streamlined processes, and standardized practices, they reduce per-unit costs as they grow. This is achieved by increasing the number of outlets, optimizing supply chains, and leveraging technology, allowing the firm to operate efficiently at a large scale.
Explanation (about 300 words):
The minimum efficient scale (MES) refers to the smallest level of production at which a firm can achieve the lowest average cost per unit. For large firms like McDonald’s, reaching MES is crucial for competitiveness and profitability. McDonald’s attains its MES by expanding its operations and output until it can fully exploit economies of scale.
Initially, when McDonald’s starts or opens new outlets, it may operate at a smaller scale where average costs are relatively higher. However, as it grows, McDonald’s benefits from several types of economies of scale:
- Technical Economies of Scale: With more outlets and higher production, McDonald’s invests in advanced kitchen equipment and automated systems. This leads to faster service and lower costs per burger or meal produced.
- Purchasing Economies: Large-scale operations allow McDonald’s to negotiate bulk buying agreements with suppliers. This reduces the cost of raw materials like meat, buns, and packaging, lowering the overall cost per unit.
- Managerial Economies: With a wide network of restaurants, McDonald’s can employ specialized managers and centralized administrative systems, improving efficiency and reducing redundant costs.
- Marketing Economies: Marketing campaigns spread over many outlets reduce the cost per outlet for advertising, benefiting the brand as a whole.
By expanding the number of outlets globally and standardizing operations, McDonald’s reduces its average costs. The firm’s supply chain, logistics, and training programs become optimized, all contributing to the MES. Once McDonald’s reaches this scale, further expansion may yield diminishing returns, but until then, growth helps lower costs and increase profitability.
Thus, McDonald’s meets its ideal MES by leveraging growth, technology, and organizational efficiency to minimize costs while maximizing output and customer reach.