Key Diagrams - Long Run Average Cost (Natural Monopoly)

In this short video we work through the shape of the long run average cost curve for a natural monopoly.

A natural monopoly occurs when the most efficient number of firms in the industry is one. A natural monopoly will typically have high fixed costs and low marginal costs meaning that it might be inefficient to have many firms each providing the same product. Long run average cost continues to fall over a big range of output.

The shape of the long run average cost curve for a natural monopoly can mean that it is tough for smaller challenger firms to enter a market profitably. They might decide to target segments of a market where their cost disadvantage with scaled established firms is less significant.