Term
Regulators of monopolies generally have what two objectives?
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Definition
1.)A socially optimal price in which price is forced to equal marginal costs
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2.)To establish a fair return price, which forces price to equal average total cost, making the firm break even.
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Term
What is a common problem of monopoly regulators?
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Definition
It is conflicting to make Price equal Marginal Cost and Equal Average Total Cost, something has to give, and normally price can only equal one or the other.
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Term
What is a social optimal price?
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Definition
Price = Marginal Cost
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Term
What is a price that makes a firm break even?
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Definition
Price = Average Total Cost
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Term
What is the Fair Return Price?
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Definition
Price = Average Total Cost
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Term
Why do monopolies not utilize the social optimal price?
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Definition
It causes the firm to take a loss.
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Term
Why is a monopoly allocatively inefficient?
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Definition
Price is greater than marginal cost
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Term
What are the characteristics of a Monopolistic Competition?
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Definition
1.)Relatively large number of independently acting firms meaning there are too many firms to make collusion practical. There are not enough firms to ensure that firms are price takers. Firms are price makers.
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2.)Differentiated Products
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3.)There is a relatively easy entry, but not as easy as in perfect competition, with no entry barriers.
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Term
What is Collusion?
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Definition
To decide as a collective to set a price.
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Term
Are monopolies price takers or price makers?
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Definition
Price Makers, as there are not enough firms to ensure that firms are price takers.
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Term
Is Collusion practical in a monopoly?
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Definition
No, there are too many firms.
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Term
In perfect competition all products are what?
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Definition
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Term
Are products homogeneous in a monopolistic competition?
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Definition
No, they are not
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Term
What does Homogeneous mean?
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Definition
In reference to a product, it is a product that cannot be distinguished from competing products.
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Term
In what ways can products be different?
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Definition
Product Quality
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Accompanying Services
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Location
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Term
Monopolies have entry barriers, does monopolistic competition have entry barriers?
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Definition
No, it is easier to enter monopolistic competition.
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Term
Which has easier entry, perfect competition or monopolistic competition?
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Definition
Perfect competition
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Term
What kind of demand does a Perfectly Competitive firm or Price Taker yield?
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Definition
Perfectly Elastic
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Term
How do you visually portray Perfectly Elastic Demand?
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Definition
A horizontal, flat, line.
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Term
How do you visually portray Down Sloping Demand?
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Definition
A downward pointing, straight, diagonal line.
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Term
What does the demand curve of a monopolistic competition convey?
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Definition
Consumer loyalty, and the existence of close imperfect substitutes.
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Term
What type of demand do Monopolies and Monopolistic Competition yield?
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Definition
Down Sloping Demand
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Term
In a monopoly, is the firm the industry?
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Definition
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Term
Because products in a monopolistic competition are not homogeneous, is demand positively or negatively sloping?
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Definition
Negatively sloping
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Term
What is Loss Minimization?
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Definition
When a firm takes a loss, but stays open, as the cost to shutdown is greater than the cost to stay running.
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Term
In the long run of a monopolisticly competitive firm, what is the only possibility?
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Definition
Breaking even, because easy entry erodes market share therefore the demand curve declines as the number of buyers declines, entry increases the number of substitutes.
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Term
What does Economic Profit equal to indicate that a firm has broken even?
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Definition
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Term
Monopolistic Competition is allocatively inefficient because, why?
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Definition
Price is greater than marginal cost, as resources are underallocated.
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Term
Monopolistic Competition is productively inefficient because, why?
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Definition
Price is greater than minimum average total cost.
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Term
If a firm is productively inefficient, then it does not operate at the what?
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Definition
Minimum Efficient Scale
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Term
What does it mean to operate at excess capacity?
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Definition
They produce at a smaller level, in the long run, than would fully utilize their space and other resources
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Term
What does operating at excess capacity create?
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Definition
An overabundance of sellers, each of them mostly empty, much of the time.
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Term
Do monopolistic competitions operate at excess capacity?
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Definition
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Term
What is a benefit to society that monopolistic competition operates at excess capacity?
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Definition
Society gains a greater variety of product offerings
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