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Instructions:
Long-term economic profit is zero in completely competitive markets. If that’s the case, why do businesses try to enter such a market?
FOR THIS WEEK’S LE, THE PROFESSOR’S RECOMMENDATIONS ARE AS FOLLOWS:
There are no obstacles to entry in a totally competitive market, and enterprises can enter and exit the market based on their earnings.
1. Make that you have read the relevant chapter in the textbook.
2. Review the YouTube videos for this week as well as the supplemental course materials.
NOTE:
submit your 300-400 word essay
Respond to at least two posts from your peers’ discussions with at least two 100-200 word comments (replies).
Henry Nwosu (Henry Nwosu)
Long-term economic profit is zero in completely competitive markets. If that’s the case, why do businesses try to enter such a market?
Profits are generally defined in terms of what economists refer to as economic profits. The difference between total revenue and the entire opportunity cost of producing the firm’s goods or services is called economic profit (Michael & Jeff, 2016). As a result, the explicit cost of using a resource also includes the implicit cost of foregoing the optimal alternative use of the resource.
The concept of zero economic profit ignores opportunity costs. In the long run, all production factors are flexible. Free entry and exit, as well as great resource mobility, are two of the businesses’ assumptions in perfect competition.
Firms that make anomalous profits will attract new firms in the long term due to the two assumptions just stated, which will increase industry supply (and shift the supply curve to the right), lowering industry prices (Adam, 2021).
New firms will cease to enter the market once current enterprises have made no economic profit.
Firms that are losing money in the long run (producing below the break-even price) will leave the market because they are unable to compete with other firms. This reduces supply in the industry (and moves the supply curve to the left), raising prices.
Industries will cease to exist until the remaining ones return to making an average profit. As a result, all firms under perfect competition gain an average return (or no economic profit) in the long run (Biglaiser & DeGraba, 2001).
To summarize, economic profits attract entry, economic losses cause exit, and industries in a fully competitive industry will generate zero economic profit in the long term. It will incentivize entry or exit in the long run, causing price to fluctuate to the point where enterprises make no economic benefit.
References
Adam Hayes is a writer and a musician (2021). Corporate Finance & Accounting, Investopedia. https://www.investopedia.com/terms/f/fixedcost.asp was retrieved from https://www.investopedia.com/terms/f/fixedcost.asp #::text=What%20Is%20a% 20Fixed% 20Cost% 20of% 20any% 20specific% 20business% 20activities?
Gary Biglaiser and Patrick DeGraba (2001). Downstream Integration by a Bottleneck Input Supplier With Wholesale Prices That Exceed Costs. 30215 in RAND Journal of Economics, vol. 32, no. 2.
Jeff Prince and Michael R. Baye (2016). McGraw-Hill, 9th edition, Managerial Economics and Business Strategy Hill Irwin (Hill Irwin)
Oluwole Adunbarin (Oluwole Adunbarin)
In neoclassical economics theory, perfect competition is a theoretical market structure that generates the best possible economic outcomes for consumers and society. Supply and demand are the driving forces behind the creation, price, and consumption of products and services, according to neoclassical economic theory. (2020, Hall)
In the long run, a company has the freedom to change all of its inputs. Because there is a free entry and free exit in a completely competitive market, new firms can enter any market and old firms can quit their markets. As a result, at long-run equilibrium, production takes place at the lowest possible cost per unit, and all economic profits and losses are erased (Michael, & Jeff, 2016).
In the long run, economic profits in a given business attract new enterprises to the industry. The supply curve swings to the right as new firms enter, prices fall, and profits decline. Firms will continue to enter the business until the industry’s economic profits are zero. Some companies will leave a sector if they are losing money. As the supply curve shifts to the left, the price rises and losses decrease. Firms will continue to leave until the remaining firms are no longer losing money, or until economic profits have reached zero (Michael, & Jeff, 2016).
Economic profit is total revenue minus total cost, where cost is evaluated as opportunity cost in the economic sense. If entire costs exceed total revenue, an economic loss (negative economic profit) occurs. Accountants, on the other hand, compute total cost using only explicit costs. Charges for factors of production such as labor and capital, as well as an estimate of depreciation, are included in explicit costs. Accounting profit is profit calculated using solely explicit costs. In the same way that entering eliminates long-term economic profits, leaving eliminates long-term economic losses (Kenton, 2020).
Reference:
M. Hall is an author who has written several books (2020). Why Are There No Profits in a Market That Is Perfectly Competitive? Why are there no profits in a perfectly competitive market? https://www.investopedia.com/ask/answers/031815/why-are-there-no-profits-in-a-perfectly-competitive-market.asp
W. Kenton (2020). Neoclassical Economics is a type of economics that is based on the https://www.investopedia.com/terms/n/neoclassical.asp#neoclassical
R. B. Michael and P. B. Jeff (2016). 9th edition of Managerial Economics and Business Strategy ISBN: 978-1259290619 McGraw-Hill Irwin
RUBRIC |
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Excellent Quality 95-100%
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Introduction
45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Literature Support 91-84 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned. |
Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met. |
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Average Score 50-85% |
40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided. |
83-76 points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration. |
52-49 points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met. |
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Poor Quality 0-45% |
37-1 points The background and/or significance are missing. No search history information is provided. |
75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration. |
48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met |
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ECO 6150 Discussion on New Businesses and Competitive Markets |
ECO 6150 Discussion on New Businesses and Competitive Markets