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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
by 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.