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Can you add some detail? Isn't it true that in a competitive market the actual profit tends to 0, in the long term? (whatever you call it; the actual money you
by loboman 14y ago
Can you add some detail? Isn't it true that in a competitive market the actual profit tends to 0, in the long term? (whatever you call it; the actual money you make at the end of the day). From what I understand in your message, this is not true, but the truth is that there is a different value, "economic profit", that tends to 0. Is that right? If so, why doesn't the actual profit tend to 0?
Edit: most importantly, how can the economic profit include a term for opportunity cost, isn't the opportunity cost different for every person / company?
- dllthomas 14y agoIt's been a while since I took micro, but from what I recall... In a competitive market, the "actual" (IIRC, the term you want is "accounting") profit doesn't tend toward zero, no. If it falls low enough that more accounting profit could be had elsewhere, firms will move to that elsewhere, supply will be reduced while demand stays the same, and firms will see more accounting profit.
- EGreg 14y agoEven as a theoretical concept, perfect competition doesn't have to always make profits approach zero. It's true that competition produces a race to the bottom on price, but there is also a race to the top on quality / innovation. As new innovations occur, they increase profit. In the absence of innovation, perfect competition would drive profits down.