Question

In a perfect competitive market, the economic profits are zero. Then why does anyone wants to enter this market in the first place? For example, the gas station market is one example of perfect competition but yet we see new entries to the market. What justifies that?  

Answer 1

Economic profit means that economic cost is taken into consideration, rather than accounting cost. The difference between them? Economic cost also includes the intrinsic costs - opportunity cost. Therefore, if I use my own house for starting a business, then the money I would have gained if I gave it on rent is the opportunity cost - cost of forgoing an opportunity. Mind that house renting is the next best alternative after starting a business.


Now, getting to the point. Economic profit is zero - this means the person is at the equilibrium point in a perfectly competitive market. In a perfectly competitive market, the supply curves will keep shifting in such a manner that the equilibrium comes at the zero economic profit. If the price is greater than what would give zero economic profit, new sellers will rush into the industry and the supply curve will shift to reduce the price to that corresponding to zero economic profit. Similarly, if the price is less than what corresponds to zero economic profit, some sellers will leave the market, and supply curve will shift to increase the price to that corresponding to zero economic profit. Why zero economic profit point? Because zero economic profit means that the supplier is utilizing the resources in best possible way in the market, there cannot be a better way. This is because in economic cost, opportunity costs are included.f your economic profit is zero, it means that your accounting profit is actually higher than zero because it doesn't take into account opportunity cost. A zero economic profit means that there is no incentive to stop doing business because there is no other alternative that is more attractive.

For example, accounting profit is the profit you can find on a balance sheet. If your factory has revenues of 200,000 and costs of 150,000 then your accounting profit is 50,000. These are known as explicit costs. Economic profit includes implicit costs as well. These include opportunity costs. Imagine that instead of spending 150,000 on your factory, you put it into a bank account and earned 10% interest over the year. That's 15,000. Then instead of opening your own factory you could had worked for someone else and earned 35,000. Now your economic profit is 200,000-15,000-35,000 = 0. < That is the zero condition.