Economies of scale are one of the most powerful forces in economics. Answer the

Question

Economies of scale are one of the most powerful forces in economics. Answer the following questions related to this very important principle of economics:

Explain how economies of scale are particularly important to a monopolist, be they real (in reality, there are very few examples of monopoly in the real economy) or hypothetical.

Building on question (a.) above, in the event that a new competitor decided to enter this otherwise monopolistic market and building on their natural competitive advantage of economies of scale, what would the embedded monopolist do to thwart the new competition?

Are there any economic lessons that a non-monopoly firm can learn from the hypothetical monopolist in the development of its own strategy for building a competitive advantage in the real world in which it operates? Explain.

Explanation / Answer

1) Economies of scale refers to decrease in average cost because of large scale operation.

A monopolist faces a market in which he is the only seller and producer. If the market that he serves is that much give, to serve that his operations run of large scale then he can enjoy econmies of scale. By being able to produce at large as the monopolsit is the only provider to the market, the monopolist can make his avergae cost reduced much. This reduction in cost can help him serving all the consumers in teh market with all types (high and low) demand by chraging lesser price to all or charging lesser price to low demand people if he can differentiate among them. However to charge low price in each case he would be needing to produce at large scale to gain econmies of scale.

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