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.)
sarah73,
Sorry for hastily dismissing your post as "Just wrong!". I was indeed looking at what you were saying through an "Austrian lens", in which case it doesn't make much sense; we're speaking different economic "languages". I may have a chance to respond to you tomorrow, but otherwise I'm sure someone else can pick up where I left off.
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.
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.
If we are talking about a production process that is easily copied, then I think you're right that free entry will imply that economic profit should go to zero for all firms in the long-run. Of course, in the long run, the firm should also be operating at the min point of its long run average cost curve. So, it would already be employing the level of capital that minimizes costs--accumulating more would only make its production process more costly.
Still, you are assuming the production process is easily copied. But you can't copy Steve Jobs or Henry Ford with a Xerox. :P Entreprenurial talent is a fixed resource that can command "rent" (returns in excess of opportunity cost) even under competitive circumstances.
Here is an interesting video from Glenn Weyl's intermediate micro course at U. Chicago that covers the importance of talent to a firm's long-run profits (pp slides accompany the lecture).
http://www.youtube.com/watch?v=hzEPXUyrgFc
http://home.uchicago.edu/weyl/Lecture5_Turbo.pdf
Ambition is a dream with a V8 engine - Elvis Presley
Well, well, well... look who's finally returned to our humble forum...
Glad to see you're back.
Yah, I thought the forum was a little TOO humble without me. I figure I have more than enough self-regard to go around, so I am back for a little while (at least till school starts again ).