Alright. So let's go ahead and discuss what some of those barriers to entry are. What's keeping other firms from joining a Monopoly's market? Okay, the first one here is the ownership of key resources. A really good example is this company De Beers that provides diamonds, right? It is a huge diamond seller. For a very long time, they owned almost all the diamond mines in the world and they had very much control over the supply of diamonds. More recently, there have been other diamond mines found in different regions. Now, imagine if you wanted to start a diamond business, you would need a source of diamonds, right? But if this company controls all the sources of diamonds, you can't get into the business, right? That would be a barrier to entry.
So, the next one here, government regulation. The government can help an inventor secure a patent for their good, for their invention. Thus, an inventor will create something and then a patent will give them the exclusive right to produce it, right? So, imagine you invented, let's say, an alarm clock radio, and you went to the government, filled out the forms, and you got a patent. Now, since you have the patent, you are the only one who's allowed to produce this alarm clock radio, right? If someone else were to produce it, you could file a lawsuit against them, right? They're not allowed to do it. You're the only one, and since you're the only one allowed to produce it, you have a monopoly over that good, right? So if I wanted to get in there and start producing alarm clock radios, I couldn't do it, right? Because you're protected by that patent. Okay, so that's another barrier to entry if the government issues out patents or some sort of protection to the supplier of the good. Cool?
And the last one here is economies of scale, right? So, remember when we talked about economies of scale; the idea here is that if you were to increase your quantity, the quantity you're supplying, your long-run average total costs decrease, right? That's what economies of scale are. You can be increasing quantity, but your average costs are still decreasing, so you're getting economies of scale. So, what this leads to is a natural monopoly. A natural monopoly exists when there's large economies of scale, or there are huge quantities that can be produced, and those economies of scale continue. Okay? So you can imagine like an electrical company. They're going to have really high fixed cost, right? If you can imagine an electrical company to set up, they're going to have to build these huge generators, right? They need to build an infrastructure throughout the city to supply the electricity, so all that costs a lot of money, but then after that point, once it's all set up, it doesn't really cost very much to add another customer, right? Think about the last time you set up electricity. You call the company and you're like, hey, I need electricity in my new apartment, and they're like, okay, give me one second, they flip a switch and the electricity is on, right? There's not really much of a cost to them after those high fixed costs, very low variable costs, right? The marginal cost of adding another customer means that they want basically as many customers as they can, right? Because they've spent all this money on the fixed costs, and it doesn't cost them much just to add more customers and get more revenue. So, what we see here on this graph is a long-run average total cost curve, right? And this is a demand curve right here. So, you could imagine that a market that’s going to end up being a monopoly, or a natural monopoly, would have some sort of situation like this. Okay? Let's say that this demand, this is a huge demand here, alright? This is for like the entire region for electricity, and let’s say this is, I don't know, like 30,000,000 watts, I don't even know what's a good amount of electricity, right? But I'm trying to say it's a big number, right? If two companies tried to supply it, if there were two companies in the market, one supplying 15,000,000 and another one supplying another 15,000,000 watts. So, let’s say something around here where two companies are trying to supply 15,000,000, well, look what happens to the cost, right? Let's say they have the same cost just to keep it simple. The idea here is if there are two companies trying to each supply half of the amount, they can't be as efficient as one company selling the whole amount, right? Because look at this higher cost right here. This is let’s say average total cost for two companies, right? And this is average total cost with one company, right? So, you can see it's a lower average total cost when just one supplier does it. Now, this isn't every market; this is the market for a natural monopoly and it's generally something where there are really high fixed costs and then very low variable cost for another customer, right? Just like we explained with electricity. So, in these cases, this is a special case where it actually makes more sense for one company to supply to the market rather than a bunch of companies.
Okay? So, these are the barriers to entry. You can see how this could be a barrier to entry. If, let's say there were two companies, right? There were two companies each providing 15,000,000, well, one company could do is expand, right? They could expand their production and lower their costs, right? They could get to this point right here and keep expanding and expanding until they put the other company out. So, these economies of scale end up being a barrier to entry, especially once the firm is cemented into the business, right? So your utility company that provides electricity has probably been around a long time, so you can imagine they're already cemented there. There's not going to be another company that can come in and now start building new generators and stuff, it's just not going to happen.
Alright, so that's going to be the barrier to entry there. Alright, so let's go ahead and move on to the next video. Let’s do that now.
