Perfect Competition only, producing, long, product, minimum

metoyoushe

how to firms survive in Perfect Competition?

In the short term, They have zero Economic profit....so earn only Normal Profit i.e. the wages the entrepreneur earns....
They Can expand upto a point where the long term cost is at minimum point.....
So they dont earn any profit....
so how do they earn a profit ?
Is it by producing a variant of the product and earn a profit until some firms see this opprotunity and enter the market and decreses the profit to zero....and so on


So why are they in this business....They better keep their money in a bank which may give an interest same as opportunity cost

And lastly ...a very frank question...does a pure competition scenario ever occur? any examples???

Thanks!!!



Edited 2 time(s). Last edit at Wednesday, September 16, 2009 at 08:16AM by varundarji.

smartpants

"Perfect competition" with zero profit is purely conceptual. It's the point at which firms will be indifferent between staying in the market and exiting the market. Consequently, the number of firms in a perfect universe will be stable at this point.

In reality, firms will not operate for zero profit, since there are costs of capital, i.e. opportunity costs. In a CFA curriculum context, you could explain this by saying that investors have a required return (variable "r"), which is equal to the risk-free rate plus some risk premium. While this does not imply zero profits, it could imply zero profit above the cost of capital.