In economics, the short run is a period when one or more of the factors of production are fixed.The factors of production include land, labor,...
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In economics, the short run is a period when one or more of the factors

of production are fixed. The factors of production include land, labor, capital, and entrepreneurship. For most firms, fixed assets such as plant and equipment are fixed in the short run.


Perfect competition is an ideal market structure where market supply and demand determine overall market price and quantity. Products are homogeneous. Firms are price takers. In other words, supply and demand dictate prices and firms must respond to market price rather than set prices for their goods or services. There are many firms selling the same type of product such that no one seller has significant market share. There are no barriers to entry or exit. Buyers and sellers have perfect information.


Since perfect competition is an ideal standard. Very few firms come close to perfect competition. Agricultural products come close to perfect competition. One farmer's tomato is the same as other farmers' tomatoes of the same type of tomato. At a store, consumers would not be able to tell which farm or farms their tomatoes came from.


In the short run, and individual firm's demand curve is perfectly elastic and at market price. For the individual firm competing in perfect competition, market price is equal to marginal revenue and average revenue per unit (Butters & Asarta, 2019).


In perfect competition, firms will maximize profits where marginal revenue equal marginal costs. Profit or loss will be determined if this intersection between marginal revenue is above or below average total cost curve for the firm. When marginal revenue, marginal cost, and average total cost all equal, a firm is earning an accounting profit where economic profit is zero. Economic profit is accounting profit less implicit opportunity costs of staying in business for a firm (Butters & Asarta, 2019). Thus, economic profit of zero means firms earn a normal profit a normal net income for that industry or business.


In the short run, firms in perfect competition respond to changes in market price. If market price increases, firms will produce more, especially when market price is above average total cost. In this situation, economic profits may attract more firms into the market since there are no barriers to entry in perfect competition. If market price declines, firms will produce less. Firms may stay in business at a loss so long as they cover average variable cost per unit. When price is above average variable cost, money will be left over to cover some of the fixed costs incurred by a business. Finally, a firm will shut down if market price falls below average variable cost. Producing produce would only lead to a larger loss.


In the long run, firms in perfect competition will enter and exit until economic profits are zero. Once again, accounting profits are positive. No firm will stay in an industry in the long run without earning a normal rate of return.


From my posting, can students formulate the difference between accounting profit and economic profit?




Reference
Butters, R. B., & Asarta, C. J. (2019). Principles of economics (2nd ed.). McGraw-Hill.

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