Question

1) Please give an example of a market that comes close to being considered perfectly competitive.



2) What does it mean when firms in a perfectly competitive market earn $0 in economic profits?



Write at least one paragraph on these questions

Answer 1

1.

Wheat market or market for farm products.

Perfectly competitive firm produce homogeneous product and there are free entry and exit. There are many buyers and sellers. And they are price taker. Wheat market has all of above characteristics so it comes under perfect competition.

2.

Perfectly competitive firm earns zero economic profit in long run. Because of free entry and exit. When there is positive economic profit, firm enters the industry and supply for each firm reduce and price decrease. When there is negative economic profit, firms will exit the market and supply for remaining firms will increase and price will increase. At the end of this process of entry and exit, all firms will earn zero economic profit.

Why firm stay when they earn zero economic profit? Because they earns accounting profit. Economic profit considers explicit as well as implicit cost but accounting profit only considers explicit cost. So if firms earn zero economic profit, accounting profit is positive.