I’m learning about how long run output/profits affect entry and exit in a perfect competition market. To my knowledge, firms enter and exit until all firms earn zero economic profit. What I don’t understand is why firms would continue operating if they were making zero economic profit? Why would they want to operate in a market that makes no profit?
Please explain to me. I think I’m missing a point here. Thanks.
That model, you will learn, assumes that there are only 2 factor to production. Capital and labor. Then it assumes that capital must be rented. That last assumption is false. In the real world the owners of capital and firms are often the same thing. So then economic profit would not be zero. Also remember the its zeros LONG TERM economic profit. In the short run it is possible to make profit. Plus economic profit assumes that there are no constraints on inventing. That is also false, you may choose a less risky and more competitive market becuase you do not have the ability to invest in another market.
Only in the perfectly competitive market, P=MC=MR, the sum of consumer and producer surplus is the biggest. The profit is maximized, the cost is minimized, and so the efficiency called Pareto.