Question

• Using the definition and characteristics of perfectly competitive industries, explain why—in the long run—firms earn zero economic profits. Does this mean that competitive firms earn zero accounting profits? Your response should be at least 75–150 words (1–2 paragraphs) in length.

Answer 1

Perfectly competitive firms earn zero economic profit in the long run. This is because of ease of entry and exit in perfect competition. Competitive firms can make economic profit in the short run if P > ATC. If the competitive make economic profit, then new firms will enter the industry due to ease of entry. This will increase the supply and push down the equilibrium price, where MC= Minimum ATC= MR. MR= P in competitive firms.

Accounting costs include only explicit costs that require monetary payouts like rent, wages.

Economic costs include both explicit and implicit costs. Implicit costs are opportunity costs of the entrepreneur's resources employed elsewhere.

Revenue- explicit costs = Accounting profits.

Accounting profits- implicit costs= Economic profits. Even if accounting profits are positive, the firm can suffer economic losses. A firm can earn positive accounting profits but still earn zero economic profits.