A student in a principles of economics course makes the following remark: "The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero profits." Is this remark correct or incorrect?

Question

Amos

Business

29 January, 18:24

A student in a principles of economics course makes the following remark: "The economic model of perfectly competitive markets is fine in theory but not very realistic. It predicts that in the long run, a firm in a perfectly competitive market will earn no profits. No firm in the real world would stay in business if it earned zero profits." Is this remark correct or incorrect?

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Answers (1)

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Hawk · Answer 1

The remark is incorrect.

Explanation:

The student says that firms in a perfectly competitive market earn zero profits in the long run which does not apply to the real world. The firms in the real-world will not operate at zero profits.

The student is getting confused between accounting profit and economic profit. Zero profit here implies zero economic profit. The firms will still be earning positive accounting profits.

Accounting profit is the difference between total revenue and explicit cost while economic profit is the difference between total revenue and both explicit and implicit cost.