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From the firm's perspective, is an economic profit of zero a good result, a bad result...

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yaga49 | (Level 1) Valedictorian

Posted May 16, 2013 at 2:03 PM via web

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From the firm's perspective, is an economic profit of zero a good result, a bad result or merely as satisfactory result? Why?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 16, 2013 at 2:35 PM (Answer #1)

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Zero economic profit is certainly a better outcome than zero accounting profit.  For some firms, it will be the best that they can possibly aspire to.  For others, it would be something of a disappointment, but it would at least still be acceptable.

Zero economic profit is also called a “normal profit.”  In economic terms, it is what firms should make if the market functions perfectly.  It is defined as a situation where the firm’s revenue equals its explicit costs plus its implicit costs.  If a firm has zero economic profit, its resources could not possibly make more money if they were used for a different purpose.  In that sense, zero economic profit is a good result.

In perfect competition, zero economic profit is the best a firm can hope for.  There is so much competition in such a market structure that positive economic profit is impossible.  Therefore, zero economic profit would be a good result for a firm in perfect competition.

In other market structures, though, firms would not be completely happy with zero economic profit.  In other market structures, some economic profit is possible because the firms can differentiate their products from other firms’ products and can therefore charge prices that are high enough to allow for positive economic profit.

Therefore, zero economic profit is acceptable for all firms, but it is a really good result for firms in perfect competition.

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