Question

Economic profits result whenever only a few large competitors are active in a given market.” Discuss this statement using an example for illustration.

PLEASE DONT TAKE OTHER PEOPLE'S ANSWER

Answer 1

There are two types of profit that a firm earn in doing business in any given market.

One is normal profit, which is nothing but zero profit in simple words, i.e., when a firm covers all expenses/costs with its revenue and left with no margin, it is earning normal profit.

On the other hand, a firm which is covering all its costs with its revenue and also get some margin over costs, it is earning super normal profit. Super normal profit is also known as economic profit.

The statement that "Economic profits result whenever only a few large competitors are active in a given market" does not hold truth. This statement is not true, and reflects a simplistic view of the link between the number of competitors and the vigor of competition. There are different types of market structure for example monopoly, oligopoly, perfect and monopolistic competition. Holding buyer power constant, competition can sometimes be fierce in markets that involve only a handful of competitors. Similarly, markets involving several “competitors” may have little or noeffective competition. For example, despite the fact that there are relatively few providers of general aviation equipment, competition for new plane orders is often fierce and suppliers seldom earn above-normal profits. On the other hand, textile and agricultural markets involve thousands of competitors that are sometimes sheltered from import competition by trade barriers and government price support programs. To accurately assess the vigor of competition in any given market, one must carefully analyze market structure (including the number and size distribution of competitors),competitor behavior and industry performance.