When the demand for a good or service limits the quantity that can be sold to an output at which the firm experiences economies of scale, the firm is a natural monopoly.
What is economies of scale?
This refers to those benefit an organization gains as a result of expansion of the production output.
Economies of scale are the cost advantages that companies obtain due to size output or scale of operation. The cost per unit of output generally decreases when the scale increases because fixed costs are spread out over more units of output.
Economies of scale apply to a variety of organizational and business situations and at various levels, such as a business or manufacturing unit, plant or an entire enterprise.
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