Question

Q. Why a firm remains in business even by earning zero economic profit? Elaborate the answer.

Answer 1

A firm can remain in business and continue producing goods and services so long as it is able to pay all opportunity cost. Because accounting profit is generally the combination of normal profit and economic profit, zero economic profit does not mean zero accounting profit.

Accounting profit is a company's total earnings, calculated according to generally accepted accounting principles . It includes the explicit costs of doing business, such as operating expenses, depreciation, interest and taxes.

An Economic profit or loss is the difference between the revenue received from the sale of an output and the costs of all inputs used and any opportunity costs. In calculating economic profit, opportunity costs and explicit costs are deducted from revenues earned.

When economists say “zero economic profits” that’s what everyone else means by a normal profit. When the firm is making zero economic profits the workers, managers, lenders and owners are all earning their equilibrium returns. In other words, in long run equilibrium no one would be better off leaving the industry and no one would be better off entering the industry. It’s zero economic profit only in the sense that labor and capital are earning no more than elsewhere in the economy.