The firm would ideally wish to fully exploit scale economies and produce at minimum
efficient scale (MES). In so doing it has a cost advantage over competitors failing
to reach this output. The degree of disadvantage suffered by competitors depends upon
the slope of the LRAC prior to MES, as illustrated in Figure 5.13.
Figure 5.13 shows two LRACs. Although both have the same MES, the gradient of
their respective LRACs differs over other outputs. LRAC1 shows a situation where
economies and diseconomies of scale are less significant compared to LRAC2. If a firm
were producing Q* at one half of MES it would suffer a cost disadvantage compared to a
rival producing at MES. However, the cost disadvantage on LRAC1 is less than with
LRAC2. The size of MES relative to total market demand determines the number of