A monopolist finds that it's fixed cost increase. What will be its short-run response?

In the first place, we could clarify that the "monopoly" is a market structure where there is a single provider of a certain good or service, that is, a single company dominates the entire supply market.

When there is a monopoly in a market, there is only one company capable of offering a product or service that has no close substitutes. In this way, consumers who wish to acquire the good can only go to the monopolist and must accept the conditions imposed by it. A trade monopoly is a situation where only one organization controls all trade with another country or geographic area.

If a monopolist discovers that its fixed costs are high, it is a "natural monopoly": a natural monopoly occurs when economies of scale are of such magnitude that a single firm is able to satisfy all demand more efficiently than a single firm. group of competing companies. Natural monopolies are born in industries with high capital costs relative to variable costs and market size, generating large entry barriers, in other words, a firm is a natural monopoly when capital costs are so high that it stops operating. be economically viable for a second firm to enter the market and compete.

In the vast majority of industries, the marginal cost decreases due to economies of scale. A natural monopoly has a different cost structure, with huge fixed costs, but constant, fixed and small marginal costs.

Therefore, if a monopolist discovers that its fixed cost increases (with constant, fixed and small marginal costs), in the short term it could have losses, since the price is higher than the variable average cost and manages to cover all its fixed costs, that is why the loss arises in the short term.

The main source of economies of scale are fixed costs, that is, the costs that must be incurred, regardless of the quantity of product produced. A typical example is electricity generation plants. As production increases, fixed costs per unit of output decrease and total average costs may decrease. Economies of scale may exist at low levels of output and not exist at higher levels of production.