Fender recently put up a really good article on the history of the Fender Mustang. The article is definitely worth a read. [The Fender Mustang Guitar @ Fender.com]
Small excerpt from the article below:
Fender was keenly aware in the mid-1950s that there was much to be gained by offering “student” instruments for retailers who offered in-store music instruction. The thinking went that if beginners with beginner guitars stuck with it, dealers who offered lessons were well placed to launch them to the next level by selling them full-size Fender Telecaster® and Stratocaster® guitars. Hence the arrival in 1956 of Fender’s first two student guitars, the single-pickup Musicmaster® and the two-pickup Duo-Sonic™. Both were short-scale guitars (22.5” compared to 25.5” for the Telecaster and Stratocaster) at the low end of the price list ($119.50 and $149.50 respectively). Fender revamped its student guitar line in 1964 by offering both guitars in both short and medium (24”) scales and by introducing an entirely new guitar that August, the Mustang.