Key Diagrams - Monopoly and Productive Efficiency

In this video we walk through a diagram about what happens when a monopoly supplier is able to achieve significant economies of scale.

One of the potential advantages of monopoly is that a dominant firm can achieve significant internal economies of scale that mean the average cost of supplying to the market is lower than if the market was fragmented with lots of smaller competing businesses. In theory, if the scale economies are large enough, the profit maximising monopoly price might even be a little lower than the competitive equilibrium price leading to higher consumer surplus (in other words, a gain in economic welfare).

It takes very large economies of scale for this effect to happen – so perhaps revise the economics of a natural monopoly as part of your revision. In evaluation, the lack of competition might lead to a monopolist experiencing X-inefficiencies arising from low productivity and rising fixed costs that are independent of output.