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From...economics? Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the mar
by eropple 7y ago
From...economics?
Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
- wcoenen 7y agoWouldn't you expect the rate of return to approach the risk free interest rate, rather than profit being zero?
- vikramkr 7y agoZero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.
- MR4D 7y agoThe risk free interest rate is zero. Heck, by the time you read this, it could go negative!
- wernercd 7y ago"Profit is market inefficiency" Profit is motive to do something. No profit = no motive. "perfect efficiency" means "no market" in this definition. It's a make believe process that will literally never happen. Companies that work with perfect efficiency close their doors.
- vikramkr 7y agoYep. Perfect markets dont actually exist in any realistic way, and the US constitution itself deliberately breaks perfect markets by providing for patents.
- quadrangle 7y agoWell, sorta but um no. If no profit includes a situation where everyone involved is paid at least enough that they are willing to do the work, then there is by definition motive to do the work. These economic models are simplistic to the point of stupidity. But motivation to do the work can be totally priced in to the equations as a cost of doing business. Profit beyond that is what must, in the models, end up at zero to be efficient.
- wernercd 7y agoEveryone involved includes those who put forth the capital to start businesses. The profit goes to them eventually via the stock market. Individuals won't put up millions or billions to start large companies without a reason. "models" remove human motivations and will never be realistic. It's why Socialism and Communism are perfect on paper... but fail spectacularly in real life.
- vikramkr 7y agoNot necessarily the stock market, but yes of course all models are wrong. Some are useful though, including these models. You can see that a pharma company with a government granted monopoly with patent power has high gross margins, while a more undifferentiated retail firm like walmart has far lower gross margins. That understanding can be drawn from using these models to understand how businesses will behave under a set of given assumptions (they want to maximize profit etc)