This is correct economically, assuming a competitive environment, profits will always equal 0 over time.Competition will cut profits from all. Anyway they are heading to 0 profits according to Bertrand Paradox
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This is not correct. In a competitive market, marginal revenue = marginal cost. That is NOT the same thing as zero profits.
MR=MC in a monopolistic environment I believe. In a competitive environment with multiple firms, the competition will drive economic profits down to zero over time.
No, in both competitive and monopolistic environments, MR = MC. For competitive firms, marginal revenue = price. For monopolies price is always less then marginal revenue. Monopolies have a downward sloping marginal revenue curve.
Hmm, well my understanding is monopolistic firms can price over their MC and therefore assure a profit. In contrast, in a competitive environment, firms will always be entering and exiting a given industry and drive profits down to zero. Hence over time, the aggregate firms will make zero profit. Only during times of imbalance will there be profits. It is similar to how stocks trend towards equilibrium.
No. In economics, everything is evaluated at the "margin". Not in the whole. So as a firm, I will always produce if the next unit's marginal revenue = marginal cost. Monopolies control supply of a market and have a downward sloping MR curve. They can manipulate price by witholding supply (OPEC). Competitive firms have no such luxury. If MR is > then MC new firms will enter a competitive market until MR = MC. Here is an easy way to think about this. Say I make widgets in a competitive market. MC increases with production. In the beginning I have fixed costs so my MC curve starts out high but goes down over time as those fixed costs get absorbed. At some point though my MC curve starts to swing back up. The reason for this is because in a competitive market, firms compete for resources driving those costs up. So the more we produce, the more it costs to get those resources. Let's say I make 1000 widgets a year. I don't make the same profit on each widget. I might make $200 on the first 250, $100 on the next 250 and $50 on the final 500. At 1000 widgets, my MC might equal $30 and that 1001 widget marginal revenue = $30. So I will stop producing at 1000. The next marginal unit no longer produces a profit. There is no incentive for new firms to enter now. Because it will cost them $30 to make a unit that delivers $30 in revenue. But my firm is still profitable. I'm making money on my first 1000 units. But input costs are higher now which is keeping new firms from entering. Since firms can't control price in a comp market, they can only increase their profits by cutting costs.
In a monopoly one of the unique features is that input costs can actually go down as you produce more through economies of scale. Since there are no other firms competing for resources. So the more I produce, my costs can go down, not up. But monopolies set their price on their demand curve, not their MR curve. Comp firms set their price off their MR which is = to MC. Monopolies will want to maximize their profits my optimizing the qty sold. They can set a high price but that price might not maximize their revenues as qty sold will be less. So they will lower price to where the total revenue is maximized.
Just as a warning, but usually the first person to distinguish "economic" from "accounting" profit is going to have the best argument.
Jus...... jus... jus sayin'.......
Jus...... jus... jus sayin'.......
Yes of course. Economic profit takes into account opportunity cost as well as accounting cost.
In economics and commerce, theBertrand paradox— named after its creator, JosephBertrand— describes a situation in which two players (firms) reach a state of Nash equilibrium where both firms charge a price equal to marginal cost ("MC").
Nash e·qui·lib·ri·um
noun
Nash e·qui·lib·ri·um
noun
- (in economics and game theory) a stable state of a system involving the interaction of different participants, in which no participant can gain by a unilateral change of strategy if the strategies of the others remain unchanged.
This is what I am saying. In a competitive market, firms reach equilibrium and therefore economic profit becomes 0. The only way to profit is during the imbalance which by definition will trend towards equilibrium at profit 0. That is not to say that the ACCOUNTING profit of such firms are the same at economic profit point 0. But it is a losing proposition over time because other firms will come and go and the name of the game then becomes survival knowing that times of profiting are limited. In other words, as more and more hedge funds utilize the same types of technology they become more and more PERFECTLY competitive economically. That works to kill off any economic profits (or at least minimize them since perfect competition is arguably a fiction).
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