Natural monopolies arise due to high startup costs and significant economies of scale that allow only one efficient firm. They are often regulated to protect consumers. Examples include utilities, internet providers, and railroads. A natural monopoly exists naturally due to market forces, unlike regular monopolies formed by eliminating competition. Natural monopolies have high fixed costs and barriers to entry that prevent competition. They maximize profits by pricing in the elastic portion of demand rather than the inelastic portion where price changes have little effect on revenue.

1. Understanding Natural
Monopolies and the
Monopolist's Avoidance of
the Inelastic Demand Zone
Group - 11
Amit Bakde
Chinmay Sathe
Kedar Deshpande
Sanatan Panigrahi
Nagakalyankumar E
Girish Margaje

2. Natural Monopoly
• A natural monopoly is a type of monopoly that arises due to unique
circumstances where high start-up costs and significant economies of
scale lead to only one firm being able to efficiently provide the service
in a certain territory.
• A company with a natural monopoly might be the only provider or
product or service in an industry or geographic location.
• Natural monopolies are allowed when a single company can supply a
product or service at a lower cost than any potential competitor but
are often heavily regulated to protect consumers.
Examples of Natural Monopoly
• Internet Providers
• Utility providers such as water, sewer services, electricity transmission and energy
distributors, natural gas transmission
• Telephone Companies, landline services
• Railroads

3. How is Natural Monopoly Different From a Regular Monopoly
A natural monopoly exists naturally. Market forces allow
one player in the market to become the only player in a
certain industry without stifling the competition. Regular
monopolies, on the other hand, are created when a
company controls the market by eliminating the
competition. This happens when a key player buys up the
supply chain and buys its rivals. Monopolies may lead to
the removal of substitute products and services, higher
prices, and low-quality products.

4. CHARACTERISTICS OF A NATURAL MONOPOLY
• They occur naturally in the free market as competitors are willingly or
unwillingly unable to compete with them. Economic forces naturally
prevent other companies from entering the market.
• Usually, this monopoly has the characteristic of a long-run average that is
steeply declining.
• They have curves of marginal costs that decline steeply too.
• It is rational for one firm to supply the entire market. Competition is
undesirable.
• As a result, the market has space only for one company to come forward
to exert its monopoly through its completely exploited scale of economies
and product supply in the market.
• Economies of scale make the firms have a high fixed cost. They also
have higher maintenance charges along with a prime initial fixed cost. As
this cost is huge, these firms have to cater to the entire market.

5.  High Initial Investment Costs: Natural monopolies typically involve industries that require substantial upfront
expenses, such as infrastructure and capital investments. These initial costs represent a substantial portion of
the overall production expenses.
 Illustration: Consider a municipal water supply system. The construction and maintenance of a city's water
infrastructure, including pipelines, treatment facilities, and reservoirs, entail considerable capital investment and
significant fixed costs.
 Formidable Entry Barriers: Natural monopolies are characterized by significant obstacles that discourage or
prevent other businesses from entering the market and competing effectively. These barriers can encompass
legal and regulatory hurdles, economies of scale, and unrecoverable costs.
 Illustration: The development of a nationwide high-speed rail network is a colossal infrastructure project with
considerable initial costs and regulatory complexities. These barriers make it extremely impractical for multiple
firms to independently construct and operate their own networks.
 Limited or Absent Competition: In natural monopolies, competition is generally minimal or nonexistent. Even if
prospective competitors attempt to enter the market, they frequently find it economically unfeasible to do so,
given the dominance and cost advantages of the existing firm.
 Illustration: Local cable television providers frequently operate as natural monopolies. While satellite or
streaming services may be available, they do not directly compete within the same physical infrastructure and
local markets.
KEY FEATURES OF A NATURAL MONOPOLY

6. Economies of Scale
• Economies of scale are the cost benefits that a company or organization can
obtain by expanding its production, which lowers the average cost per unit of
output. In simpler terms, as a company produces more goods or services, it can
produce each unit more efficiently and at a lower cost.
Economies of scale are caused by:
• Specialization: More work can be done with specialized workers and
equipment due to higher production quantities. As a result of continuous
operation of machinery and increased worker skill and efficiency, downtime and
maintenance expenses are decreased.
• Bulk purchasing: Purchasing inputs in bigger numbers, such as raw materials
or components, frequently yields discounts or lower unit costs.
• Technology advancements- Investments in cutting-edge technology can
result in improved productivity, increased automation, and lower manufacturing
costs per unit.
• Distribution Efficiencies: Due to shipping and logistics savings, when output
rises, the cost of distribution and transportation per unit can go down.

7. Long-Run vs. Short-Run: Economies of scale are typically more achievable in the long run because firms
have more flexibility to adjust various aspects of their operations, such as expanding facilities, adopting new
technologies, and optimizing processes.
Output Quantity
Price
per
unit

8. What is Demand?
Demand—The desire for an item and the ability to pay for it
Demand refers to the quantity of a good or service that consumers are willing and
able to purchase at various prices during a specific period of time, all other factors
being equal. It represents the relationship between the price of a product and the
quantity of that product that consumers are willing to buy.

9. Law of Demand
1. As PRICE increases, DEMAND decreases
2. As PRICE decreases, DEMAND increases

10. Demand Curve
• A graph that illustrates the demand
for a product.
• It shows how much consumer desire
for a product changes as the price
changes
Depends on:
• income
• tastes
• prices of competitive products
• prices of complementary products

11. Elasticity of Demand
The degree to which changes in price cause changes in demand
It quantifies the degree to which consumers adjust their buying behavior
when the price of a product changes.
Elasticity of demand is expressed as a numerical value, and it provides
insights into consumer behavior and market dynamics.

12. Computing the
Elasticity of Demand
Elasticity of demand measures the percentage
change in quantity demanded divided by
percentage change in price
Elasticity values
• >1 it is elastic
• Percentage change in price will result in
larger percentage change in the quantity
demanded
• =1 it is unit-elastic
• <1 it is inelastic
• Demand is usually more elastic at higher
prices and less elastic with lower prices
=
Percentage change in
quantity demanded
Percentage change in
price

13. Elasticity Demand Curves
ED = ∞
(a) Perfectly elastic (b) Perfectly inelastic
Consumers demand all
quantity offered for sale at
p, but demand nothing at a
price above p
Consumers demand Q
regardless of price
Total revenue is the same for
each p-q combination
(c) Unit elastic

14. Determinants of Demand Elasticity
• Availability of substitutes
The greater the availability of substitutes for a good, the greater the good’s elasticity of
demand
• Share of consumer’s budget spent on the good
Increase in prices reduced the demand because people are not both willing and able to
purchase @ higher prices
• A matter of time
The longer the adjustment period, the greater the consumer’s ability to substitute
• Some elasticity estimates
The elasticity of demand is greater in the long run because consumers have more time
to adjust

15. Elastic and Inelastic demand response to price change
Elastic Demand: Elastic demand refers to a situation where a small change in the price of a good or service leads to a
relatively larger change in the quantity demanded.
In elastic demand, consumers are highly responsive to price changes, meaning that if the price increases, the quantity
demanded significantly decreases, and if the price decreases, the quantity demanded significantly increases.
Inelastic Demand:
Inelastic demand, on the other hand, refers to a situation where a change in the price of a good or service leads to a
relatively smaller change in the quantity demanded.
In this case, consumers are not very responsive to price changes.
Here are some real-world examples to illustrate these concepts:
• Elastic Demand: Consider a luxury car brand. If the price of these cars increases, many consumers may choose not
to buy them, and the quantity demanded would decrease significantly. If the price decreases, more people may
decide to buy, and the quantity demanded increases considerably.
• Inelastic Demand: Think about essential goods like insulin for diabetic patients. Even if the price of insulin increases,
most patients will continue to purchase it because it is a life-saving medication. The quantity demanded changes only
slightly in response to price fluctuations.

16. Monopolist’s Pricing
Short-Run
A monopolist, as contrasted to a perfect competitor, is not a
price taker but can set the price at which it sells the product.
The monopolist sets the price to maximize profits or
minimize losses in the short run. The monopolist is the sole
seller of a product for which there are no close substitutes,
the monopolist faces a negatively sloped market demand
curve for the product. That means monopolists can sell more
units of the products only by lowering their prices. Because
of this, the marginal revenue is smaller than the product
price and the marginal revenue curve is below the demand
curve the monopolist faces
Short-Run Price and Output Determination under Monopoly

17. Long-Run Price
In the long run, all inputs and costs of production are
variable, and the monopolist can construct the
optimal scale of the plant to produce the best level of
output. As in the case of perfect competition, the
best level of output of the monopolist is given at the
point at which MR=LMC and the optimum scale of
the plant is the one with the SATC curve tangent to
the LAC curve at the best level of output. As
contrasted with perfect competition, however,
entrance into the market is blocked under monopoly,
and so the monopolist can earn economic profits in
the Long run. Because of blocked entry, the
monopolist is also not likely to produce at the lowest
point on its LAC curve.
Long-Run Price and Output Determination Under
Monopoly

18. Comparison of Monopoly and Perfect Competition
Perfect competition is more efficient than monopoly only if the
lowest point on the LAC curve occurs at an output level that is
very small in relation to the market demand, so as to allow
many firms to operate and, if the product is homogenous, so
that perfect competition is possible. Often this is not the case.
A very large scale of operation is often required to produce
most products efficiently, and this permits only a few firms to
operate. For example, economies of scale operate over a large
range of outputs that are steel, aluminum, automobiles,
aircraft, etc., that can meet the entire market demand for the
product or service. Perfect competition under such conditions
would either be impossible or lead to prohibitively high
production costs.
The Social Cost of Monopoly

19. Why Monopolists Avoid Inelastic
Zone
• Profit Maximization Objective:
• Monopolists aim to maximize their profits, making pricing strategy
critical.
• Elastic vs. Inelastic Zone:
• Elastic Zone: Consumers are highly responsive to price changes.
• Small price reductions result in significant quantity increases.
• Total revenue rises with lower prices in this zone.
• Inelastic Zone: Consumers are less responsive to price changes.
• Price increases have minor impacts on quantity demanded.
• Total revenue decreases or remains stable with price changes.

20. • Monopolist's Dilemma:
Inelastic Zone Challenge:
Raising Prices: Leads to small quantity reductions but higher per-unit prices, decreasing total
revenue.
Lowering Prices: Causes minor quantity increases but significant per-unit revenue reductions, again
decreasing total revenue.
• Lower Profits or Losses:
Operating in the inelastic zone typically results in:
Lower profits or even losses for monopolists.
Inability to exploit price changes for profit as effectively as in the elastic zone.
• Conclusion:
By avoiding the inelastic zone and pricing products or services where demand is elastic, monopolists
can make decisions that maximize total revenue and, in turn, their profits, aligning with their primary
objective.