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Why firms earn zero profit in perfectly competitive markets.

Explain why a firm in a perfectly competitive market would choose to remain in business, if its profit is zero at equilibrium. Illustrate any theories or concept you decide to use to answer this question with numerical examples.

The analysis of zero profit conditions showed that firms might remain in business for a time despite being unprofitable. This situation is possible particularly for firms with high fixed capital costs. The long run price must cover out of pocket costs such as labour, materials, equipment, taxes, and other expense, along with opportunity costs such as competitive return on the owner's invested capital.

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Explain why a firm in a perfectly competitive market would choose to remain in business, if its profit is zero at equilibrium. Illustrate any theories or concept you decide to use to answer this question with numerical examples.

When the firms costs are calculated they include opportunity costs. So, when a firm is at the bottom of its ATC and charging a ...

Solution Summary

The solution contains an explanation for why in the long run firms earn zero economic profit. Economic profits are distinguished from accounting profits. The break even point, shutdown point, and long run vs. short run decisions are discussed as well.

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