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Hey guys,

For AP Microecon buffs:

I am confused about the term "zero economic profits." For perfect competition, for example, in the long run, firms realize zero economic profit. Does this mean they make $0 profit at the end, or does that just mean that they are efficient because they will not find another job that will make them more money (due to implicit costs taken into account for in economic profit).

ANyone want to shed light onto this?

By Greenmoo04 (Greenmoo04) on Wednesday, April 14, 2004 - 12:51 pm: Edit

Maybe it means they're allocating resources efficiently, as opposed to a monopolist firm?

By Relinquo1 (Relinquo1) on Friday, April 16, 2004 - 12:43 am: Edit

It actually means $0 profit(with opportunity cost accounted for of course). The key is that entry into and exit from the market is very cheap in perfect competition.

If you are making a short run profit, firms will enter the industry because they sense the profit. Now go to the market supply and demand curve. Market supply of the product shifts right(cuz more firms enter), Q demanded up, price down. Since the price is down, profits decrease as firms enter.

Then if firms are losing money because the price is low, some will leave the industry. This means less supply, and a higher price. So the price starts rising, profits increase and it starts over.

In the short run, it matters which part of the cycle you are in. In the long run though, so many cycles have occured that it really blends into zero economic profit.

I hope that was understandable/meaningful.

By Cooljay687 (Cooljay687) on Friday, April 16, 2004 - 12:13 pm: Edit

Relin, that really clarified it for me. However, because economic costs = total revenue - opportunity costs for all inputs

so does this mean opportunity costs for all inputs = explicit and implicit costs?

OK I'm confused :/

By Cooljay687 (Cooljay687) on Friday, April 16, 2004 - 12:14 pm: Edit

Also, Relin, did you take AP Micro test before? What'd you get?

By Relinquo1 (Relinquo1) on Saturday, April 17, 2004 - 02:59 am: Edit

Yup, that's correct. Here's an example that helps my brain sort through it.

You decide to be an origami maker. So you buy some paper, which costs $.50 and a pair of scissors that costs $2.00. Those are explicit costs.

Then you make 10 origami art pieces. But in that time you could have mowed 4 people's lawns for $10 a lawn, so you forego $40 as implicit costs. Total cost is then $42.50.

You can make revenue by selling your origami. In perfect competition, you are a price taker, so you sell at the market price of $5/origami piece. Thus you make $50 dollars of revenue. Economic profit is $7.50, being positive means origiami is more profitable for you than lawn-mowing.

But then, origami goes out of style and the price drops to $4.10 each. Your 10 pieces then make $41 for a $1.50 economic loss. Thus remaining a lawn-mower would have been more profitable. But you already bought the equipment (fixed cost) for $2.50; the $41 revenue is still better than the $40 revenue of lawnmowing (variable cost), so don't give up the origami yet. Say price drops to $3.90, then you should drop origami and start mowing lawns. Variable cost also includes salaries of people you would employ if it's a larger scale.

I took AP Econ as a class last semester, so I'll take the Test next month. I just have a natural knack for economics though, I did very well in the class, and on a sample or old AP test(I forget which) we had as the final I got like 58 out of 60, so I'm confident.