It is very expensive to build and run a national electricity network. One large firm can supply electricity at a lower cost than several small firms because it produces on a very large scale.What type of barrier to entry does this describe?

Question

BlackTom AI · Accepted Answer

Economies of scale occur when average cost (AC) falls as output (Q) rises, so a single large firm can produce more cheaply than many small firms. That is the core concept here.

1) Relevant knowledge points and concepts
- Fixed costs and variable costs: AC = (Fixed Cost + Variable Cost)/Q = FC/Q + VC/Q.
- Economies of scale: when FC/Q term falls rapidly as Q increases, AC declines.
- Natural monopoly: an industry with very high fixed costs and low marginal costs where one firm can supply the market at lower cost than multiple firms, creating a barrier to entry.

2) Step-by-step reasoning
- Electricity networks require huge upfront investment (power plants, transmission, grid), so FC is large.
- If one firm serves the whole market, FC is spread over a large Q, making AC low.
- If several entrants each serve a small slice of demand, each faces much higher AC because FC/Q is larger for smaller Q.
- New entrants therefore cannot match prices without making losses, so entry is deterred.

3) Calculation example (intermediate steps)
- Suppose FC = $1,000,000; VC per unit = $10; total market Q = 100,000 units.
- AC (single large firm) = FC/Q + VC = 1,000,000/100,000 + 10 = 10 + 10 = $20 per unit.
- Small entrant producing Q = 10,000: AC = 1,000,000/10,000 + 10 = 100 + 10 = $110 per unit.
- Small firm’s AC ($110) » large firm’s AC ($20), so small entrant cannot profitably compete on price.

4) Why the correct answer is correct
- The description matches "financial restrictions due to economies of scale": high fixed costs make it financially impractical for multiple firms to enter because they cannot achieve the low average costs of the dominant producer.

5) Why other options are incorrect
- a) Patent/copyright: legal protections for intellectual property, not cost structure—irrelevant here.
- c) Ownership of an essential resource: would apply if one firm controlled a scarce input (e.g., a unique mine), which isn’t the issue here.
- d) Collusion/cartel: a strategic agreement among firms to restrict competition, not the cost-driven barrier described.

6) Conclusion
- The correct answer is b. Financial restrictions due to economies of scale, which matches the provided answer.

It is very expensive to build and run a national electricity network. One large firm can supply electricity at a lower cost than several small firms because it produces on a very large scale.What type of barrier to entry does this describe?单项选择题

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