Question

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?

Answer 1

Answer:

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.