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
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.
Probably because it’s irrelevant, though I have no clue what kind of “network effect” you’re talking about.
Prices will be higher for a product when the supply is lower than the demand. It will remain this way as long as supply is low, once equilibrium is reached there will be no profits for capital expansion. How does this not directly answer your question?
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.)
This is computed into the firm’s average total cost curve.
Payment for managerial labor is not a return on capital.
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.
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.
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.
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.
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.
Oh. Well if that’s the kind of thing the the OP was referring to then I defer to Neodoxy.
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 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. 
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).
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 ).