producing a quantity of 4,000 planes, then its average costs will be higher than those of the existing firm, and it

will be unable to compete. If the second firm attempts to enter the market at a larger size, like 8,000 planes per
year, then it could produce at a lower average cost—but it could not sell all 8,000 planes that it produced

because of insufficient demand in the market.
218 9 • Monopoly

FIGURE 9.2 Economies of Scale and Natural Monopoly In this market, the demand curve intersects the long-run

average cost (LRAC) curve at its downward-sloping part. A natural monopoly occurs when the quantity demanded is

less than the minimum quantity it takes to be at the bottom of the long-run average cost curve.

Economists call this situation, when economies of scale are large relative to the quantity demanded in the

market, a natural monopoly. Natural monopolies often arise in industries where the marginal cost of adding an
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