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In an econ 101 competitive market you also will not make accounting profits. Think about about it...

dllthomas 11y ago
"Think about about it..." Implying that I haven't is needlessly rude, and not providing an explanation is unhelpful. Please do better. "In an econ 101 competitive market you also will not make accounting profits." The way I learned it, if market participants are making less than they could elsewhere then some will leave. This lowers production and raises the price. This dynamic will raise the profits the remaining producers make until they're making as much (accounting) profit as they could at the next best opportunity, which leaves the economic profit zero. I don't see what drives the accounting profits everywhere to zero.
- randyrand 11y ago
  Firms that have zero economic profits can still have accounting profits, yes. But if a firm has accounting profits, that means it's possible for another firm in the industry to price cut them. And in a perfectly competitive market they will. So accounting profits also fall to zero* Zero when accounting for the time value of money. I've read (for instance here http://catalog.flatworldknowledge.com/bookhub/21?e=rittenberg-ch09_s04 http://catalog.flatworldknowledge.com/bookhub/21?e=rittenber...) that firms can make accounting profit in the long run. But they don't go into the requirements for this to happen.... =( But I believe it is due to the time value of money - which, given a long term growing economy with relatively little inflation, will be be long term positive. I'm not for sure though.
  - dllthomas 11y ago
    "But if a firm has accounting profits, that means it's possible for another firm in the industry to price cut them. And in a perfectly competitive market they will." It's possible, but - again presuming there is positive opportunity cost - as soon as the economic profit falls below zero it is a better idea for them to leave the industry than to lower their profit further. I don't undercut your prices because I think I'll be taking home less money. I undercut your prices because I think I'll capture your business and make more money overall. If that leaves you (or some other participant) without the ability to make sufficient profit to stick around, you won't.

"Think about about it..." Implying that I haven't is needlessly rude, and not providing an explanation is unhelpful. Please do better. "In an econ 101 competitive market you also will not make accounting profits." The way I learned it, if market participants are making less than they could elsewhere then some will leave. This lowers production and raises the price. This dynamic will raise the profits the remaining producers make until they're making as much (accounting) profit as they could at the next best opportunity, which leaves the economic profit zero. I don't see what drives the accounting profits everywhere to zero.

randyrand 11y ago
Firms that have zero economic profits can still have accounting profits, yes. But if a firm has accounting profits, that means it's possible for another firm in the industry to price cut them. And in a perfectly competitive market they will. So accounting profits also fall to zero* Zero when accounting for the time value of money. I've read (for instance here http://catalog.flatworldknowledge.com/bookhub/21?e=rittenberg-ch09_s04 http://catalog.flatworldknowledge.com/bookhub/21?e=rittenber...) that firms can make accounting profit in the long run. But they don't go into the requirements for this to happen.... =( But I believe it is due to the time value of money - which, given a long term growing economy with relatively little inflation, will be be long term positive. I'm not for sure though.
- dllthomas 11y ago
  "But if a firm has accounting profits, that means it's possible for another firm in the industry to price cut them. And in a perfectly competitive market they will." It's possible, but - again presuming there is positive opportunity cost - as soon as the economic profit falls below zero it is a better idea for them to leave the industry than to lower their profit further. I don't undercut your prices because I think I'll be taking home less money. I undercut your prices because I think I'll capture your business and make more money overall. If that leaves you (or some other participant) without the ability to make sufficient profit to stick around, you won't.