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SEVENTH RULE OF COMPLEXITY: The seventh of seven basic rules of the economy. It is the observation that the world is complex, that every action has direct and often intended consequences and indirect and probably unintended effects (that is, cause and effect). A few of the more noted illustrations of this seventh rule are the circular flow (especially the expenditure multiplier) and market failures (especially externalities).

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Lesson 19: Monopolistic Competition | Unit 3: Output Page: 13 of 22

Topic: Long-Run Equilibrium <=PAGE BACK | PAGE NEXT=>

  • The long run, which is the period in which all inputs are variable, has two implications for monopolistic competition firms.

    1. A firm adjusts plant size to maximize profit in the long run.
    2. Firms enter and leave the industry to achieve zero economic profit.

  • The end result of this long-run adjustment is:

    1. The demand curve for each firm is tangent to the long-run average cost curve and the short-run average total cost curve. This ensures zero economic profit.

    2. However, because the demand curve is negatively sloped, this point of tangency takes place on the negatively-sloped portion of the long-run average cost curve.

    3. The negatively-sloped portion of the long-run average cost curve portion results from economies of scale and is less than the minimum efficient scale.

  • The primary implication is that monopolistic competition does not use capital as efficiently as perfect competition.


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PLANT

The physical capital (building and equipment) at a particular location used for the production of goods and services. A plant, or factory, is usually a relatively large production operation (compared with something smaller, like a shop). While plant and firm are occasionally used synonymously, a given firm might own more than one plant and a given plant might be owned by more than one firm.

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Today, you are likely to spend a great deal of time strolling through a department store looking to buy either a set of serrated steak knives, with durable plastic handles or a pair of blue silicon oven mitts. Be on the lookout for pencil sharpeners with an attitude.
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John Maynard Keynes was born the same year Karl Marx died.
"Good judgment comes from experience, and often experience comes from bad judgment."

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