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.

Agriculture market.

In perfect competition, firms are price taker and produce homogeneous product. There are many sellers and buyers in the market. There is free entry and exit. There is perfect information about price and product. Agriculture market has same characteristics. Farmers do not decides price but the market supply and demand decides price and they sales homogeneous product and free entry and exit.

2.

In long run, perfectly competitive firm earns zero economic profit. Because of free entry and exit. When there is positive economic profit, new firm have incentive to enter the market. Thus, supply will shift to new entrants and price will fall. When there is negative profit in the market, firm will exit the industry and supply will shift to reaming firm and price will increase. At the end of this process firm will earn zero economic profit.

Firms earn zero economic profit still remains in market why? Because the earns positive accounting profit. Economic profit includes explicit and implicit cost and accounting profit includes explicit cost only. So when firms earn zero economic profit, they earns positive accounting profit.