Economies of scale as a barrier to entry.
Concept Introduction:
Economies of scale refer to the benefit achieved by the big entity over the small entity, because of producing in much effective and cost saving way.Larger the entity, lower is the cost.
Explanation of Solution
If the increase in production results in a decrease in
The economies of scale are mostly enjoyed by the already existing firm, who have decreased its cost of production by using its resources in a most efficient way and by reducing its average total cost. The new firm cannot use its resources with that much efficiency and it cannot even reduce its cost of production, as much already existing firm can. Thus, a new firm cannot compete with the already existing firm and cannot gain economies of scale. Therefore, entry of new firm is restricted because of economies of scale.
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