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LONG-RUN EQUILIBRIUM, MONOPOLISTIC COMPETITION: Relative freedom of entry and exit ensures that, in the long run, every firm in a monopolistically competitive industry earns exactly a normal profit, receiving neither an economic profit, nor incurring an economic loss. This result is achieved because entry and exit affects the market supply curve, which affects the overall market price, each firm's demand curve, and the range or prices it can charge. Each firm's demand curve adjusts until the profit-maximizing price is exactly equal to average total cost (both short run and long run).

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PRINCIPLE:

A generally accepted, verified, proven, fundamental law of nature. A principle captures a cause-and-effect relation about the workings of the world that has been tested and verified through the scientific method. The law of demand, law of increasing opportunity cost, and law of diminishing marginal utility are three fundamental (and extremely important) economic principles.

Principles form the structural foundation of the theories used in economic analysis. As a house is constructed from concrete, lumber, and nails, a theory is constructed from principles. To be a fundamental law of nature, a principle must capture a cause-and-effect relation about the workings of the real world. One example of a fundamental law is something like: If demand price rises, quantity demanded falls. The scientific method is the process of building theories by identifying and verifying these fundamental laws of nature.

Verified Hypothesis

Every principle begins life as a hypothesis, as a reasonable cause-and-effect statement about the world. A hypothesis becomes a principle, a law of nature, only after it has been systematically and extensively verified with real world data. Professor Grumpinkston, for example, might hypothesize that seating position in a classroom affects learning and the grades earned by students. But such a hypothesis is little more than speculation until it is verified with actual observations--over and over again.

A principle, as such, captures a fundamental piece of the machinery that makes up the complex world. It is the gear, the coiled spring, the lever, the switch, that when assembled with other components make the world work. While the ultimate goal of the scientific method is to understand the entire complexity of the world, this task is accomplished one principle at a time.

Ceteris Paribus

A principle is generally stated in the form of "If A, then B" or alternatively that "A causes B." For example the law of demand can be stated as:
If demand price increases, then quantity demanded decreases.
Or:
A higher demand price causes a smaller quantity demanded.
Whichever form is used, a principle isolates the relation between two events, A and B. To isolate the relation it is critical to control other possible influences using the ceteris paribus assumption. Ceteris paribus means other factors are held constant. For the law of demand, other factors such as buyers' income, the prices of other goods, and buyers' preferences are held unchanged.

<= PRINCIPAL-AGENT PROBLEMPRINCIPLE OF MINIMUM DIFFERENCES =>


Recommended Citation:

PRINCIPLE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: July 22, 2019].


Check Out These Related Terms...

     | hypothesis | data | empirical | phenomenon | theory | verification | law |


Or For A Little Background...

     | scientific method | positive economics | economic science | cause and effect | ceteris paribus |


And For Further Study...

     | marginal analysis | model | fallacies | seven economic rules | economic thinking | assumption | axiom | law of increasing opportunity cost | law of demand | law of supply | law of diminishing marginal utility | law of diminishing marginal returns |


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