In perfect competition, the marginal firm makes no profit. But depending on how seriously you take the underlying assumptions of PC, doesn't perfect information imply that no firms will have any profit?
Why do I say that?
Well, the marginal firm makes no profit - that's known. It is possible that there are other firms that have better production structures than the marginal firm, and so they do earn profit. But can these firms really exist under perfect competition? If people are profit-maximizing and there is perfect information, then all firms would adopt the most efficient production pathway and all firms would be marginal. Hence, no profit for any firm.
And if there are no profits, there is no money for reinvestment and capital accumulation, which are some of the main drivers of improvement.
Am I just taking introductory Micro too seriously in its assumptions? (even basic understanding of better micro shows that basic neoclassical theory of the firm essentially kills the role of the entrepreneur.)
What if it's not the most economical choice but the firm does it anyway?
Even in the case of perfect competition, wouldn't other factors come to play to determine whether or not one can make a profit.
For instance, the amount of capital brought to bear generally determines how cheaply something can be produced. If you're positing perfect information are we also positing infinite capital goods? If not, then the firm able to bring more capital to bear on production will make the most profit.
Some things cannot be easily replicated either. While two firms could bring equal capital to bear on production they cannot be physically located in the same place. Being further or closer to cheap shipping could be a significant factor.
I remember years ago Coors got busted for dehydrating their beer into "flavor powder" and shipping that to save money on shipping :P Products that are low value in relation to their mass cost a lot to ship, and thus the firm closest to the largest market makes the most profit, generally.
On the introductions of a new product, the product will regardless start out more valuable than it would when the product has reached full capacity in the market. That is, all demand for the product has been met. Therefore, while it's true there wouldn't be any profit once all demand has been met, it is not true that there would be a difficulty in acquiring capital to reach demand output. Even if someone were omniscient, they would still charge more for a product on its inception than they would sell at its peak output. Similarly, if companies were underproducing due to some disaster (natural or otherwise) they would *still* charge more for the product to compensate. Yes, we do want perfect competition.
On the introductions of a new product, the product will regardless start out more valuable than it would when the product has reached full capacity in the market.
This isn't true. Do you mean it would cost more as opposed to it being more valuable?
It is percieved as being more valuable because it is more scarce upon first introduction into the marketplace. Until the market has reached saturation, the product will be sold at a higher price. The higher price will allow expansion of capital. Since the entrepreneurs are omniscient, they would know when to restrict expansion and reduce price. Though such omniscience is physically impossible.
Perfect competition doesn't mean "no profit". Firms still run an accounting profit equal to:
the cost of buying new capital to compete with other firms
+
the normal profit (which is the compensation the entrenpreneur demands to maintain their current labor effort given other opportunities to employ that labor).
Firms run an accounting profit, but not an economic profit, or profit in excess of opportunity cost.
Sorry, but I'm surprised no one has mentioned this yet.
It is percieved as being more valuable because it is more scarce upon first introduction into the marketplace.
You're ignoring network effects.
Firms still run an accounting profit equal to: the cost of buying new capital to compete with other firms + the normal profit
Firms still run an accounting profit equal to:
the normal profit
http://www.investopedia.com/terms/n/normal_profit.asp#axzz221pvwyxz - Normal profit means economic profit. We know that economic profit is always greater than accounting profit. Yet if accounting is normal + new capital, that means it's greater than economic. Contradiction.
Wheylous: You're ignoring network effects.
This is computed into the firm's average total cost curve.
Payment for managerial labor is not a return on capital.
Firms run an accounting profit
The T-account for a hypothetical firm in pure competition could never yield a credit to owner's equity because all revenues are absorbed by payments to the factors of production sans time.
but not an economic profit, or profit in excess of opportunity cost.
This sentence is nonsensical. The nature of action is such that any choice must ipso facto be in "excess of opportunity cost". Economic profit is simply a rate of return on money capital in excess of the natural rate of profit (interest).
No one mentioned this because it's wrong.
If you want to go into capital redirection for the purpose of supplying a new demand, loans would be required, though it would be a very odd type of loan since there would be no risk. Under perfect information it would be self-evident that the loan was required and the price of the product in the market place would be perfectly adjusted to pay off the loan and to meet the new demand (and to expand capital to reach equilibrium.)
Under perfect information there would be no need for market prices because all relevant information would be known by every economic agent.
Rcder: Under perfect information there would be no need for market prices because all relevant information would be known by every economic agent. It depends on how far you want to go with perfect information. Even with perfect information people would need prices to deal with things that are inherantly unknowable like natural disasters. But if we assume that even that is somehow predictable in this omniscient society, then we would still have the difficulty of moral catastrophe's where even though a business knows the perfect practice, they purposefully destroy their business for short term gains. This would still need to be counteracted by a market that would adjust prices to re-arrange the market. You seem to be forgetting that money is not only a method of extracting information from market participants, but also a tool for redirecting capital. Now, if everyone knew how capital should be arranged even before natural or unnatural disasters took place and knew the desires and in the exact proportion that all resources should be allocated to fulfill to utmost capacity subjective desires, then ya, money wouldn't be required. But at that point we're not even talking about humans anymore. Do we, as humans, want perfect competition? Yes.
Rcder: Under perfect information there would be no need for market prices because all relevant information would be known by every economic agent.
democracy is related to wars. democracy has to do what hte people want - if people dont want wars like happened during 'nam and declining irac&afgan wars, then govts are forces to widthdraw or lose popularity. And getting into a war with another democracy would be extremely unpopular, hence why democracies dont do it. Democracies set up progressive tax policies, antidiscriminatory rules and as such are economically efficient in increasing overall social welfare..
Seraiah,
The situations you described aren't cases of perfect information because unexpected events occur. As I've said, under perfect information all relevant information would be known by each individual in the economy. In such a situation prices become irrelevant.
Economic profit and accounting profit are separate concepts. If anything, accounting profit could be greater than economic profit because accounting profit includes all earnings.
http://www.investopedia.com/terms/a/accountingprofit.asp#axzz2232I1fuz
Investopedia explains 'Accounting Profit' Accounting profits tend to be higher than economic profits as they omit certain implicit costs, such as opportunity costs. Read more: http://www.investopedia.com/terms/a/accountingprofit.asp#ixzz2232NnwqX
Accounting profits tend to be higher than economic profits as they omit certain implicit costs, such as opportunity costs. Read more: http://www.investopedia.com/terms/a/accountingprofit.asp#ixzz2232NnwqX
I guess I should have made clear that I was using the classical definition. In classical economics, profit is what is left over after subtracting costs besides interest on capital and risk coverage. However, what you're saying is correct for the neoclassical model. I'm not completely familiar with Austrian models, if that is what we are discussing.
Sorry, I'm not sure what you mean by this. Normal profit can be considered the return to capital for investors equivalent to the return the investors would expect in a safe investment, plus risk.
It depends on whether you include the entrepreneur as a factor of production. Including it as a factor of production implies diminishing returns to entrepreneurship, marginal revenue product received by the entrepreneur, an upward sloping supply curve to entrepreneurship, and other problems classical economists preferred not to deal with.
When pursuing an action until marginal cost equals marginal benefit, it is not irrational to take an action with a benefit equal to opportunity cost. However, that definition of economic profit is correct under the classical model.
Rcder: The situations you decribed aren't cases of perfect information because unexpected events occur. Oh. Well if that's the kind of thing the the OP was referring to then I defer to Neodoxy. Neodoxy:Perfect competition is dumb, it's really practically useless.
Rcder: The situations you decribed aren't cases of perfect information because unexpected events occur.
Neodoxy:Perfect competition is dumb, it's really practically useless.