In the natural gas industry, low average total costs are obtained only through large-scale production. In other words, the initial cost of setting up all the necessary pipes and hoses makes it risky and, most likely, unprofitable for competitors to enter the market.

Economies of Scale describes the proportionate saving in costs gained by an increased level of production. Knowing that the production of natural gas is very expensive and requires a large investment. The costs and risks of the processes required in the upstream and downstream of natural gas discourages competition. Apart from the large initial investment, a drilling company can never be totally sure that they will be able to find and extract natural gas or petroleum. So besides having to spend a lot of money, so many risk is been assumed.

In a situation where the competitor finds natural gas, in order for the downstream process to be profitable, they must be able to extract a large volume to achieve economies of scale.

Wajihawaseem7 Wajihawaseem7 · Answer 2 · 2020-04-05T21:14:20+02:00

Wajihawaseem7 Wajihawaseem7

05-04-2020

Answer:

Answer is Economies of Scale.

Refer below.

Step-by-step explanation:

Therefore,

In microeconomics, economies of scale are the cost points of interest that endeavors get because of their scale of activity (regularly estimated by the measure of yield created), with cost per unit of yield diminishing with expanding scale.

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