Jessi McCloskey posted Apr 9, 2020
6. What is the level of profits in the long-run in a perfectly competitive market? Explain why.
Profit is generally evaluated as revenue minus costs for accounting purposes; however, economic profit also includes opportunity costs. These are costs related to lost opportunity by not producing a different product or service that may yield larger revenues. When speaking about the long run in a business, the organization is able to adjust its inputs in any way it pleases. In a market, a firm also has the ability to enter and leave the market as it pleases. Because of these two main factors, in a perfect competitive market, a firm in the long run would have an economic profit that is equal to zero (Saylor Academy, 2012).
In a perfectly competitive market, a business will be attracted to entering a market when there is profit to be made and will likely choose to leave the market when the profits are no longer present. This free entry and exit within the market will keep the system in check and so the relative numbers of items in production stays relatively the same. When there is more demand for a product, the price will climb and more companies will enter the market. As more and more companies enter the market, the short run profits are gone, and the supply begins to match demand, bringing the price back in to alignment. As the price begins to drop, more businesses will exit the market. Production cost changes will not change pricing as quickly as other factors, but over the long run the pricing will adjust to account for these changes. Fixed costs typically are not an influencer on supply or price, but again, in the long run they will drive businesses in and out of the market resulting in a zero economic profit scenario. These constant fluctuations toward equilibrium exist within a perfect market and ultimately mean that in a perfectly competitive market, economic profits must equal zero in the long run scenario (Saylor Academy, 2012).
Reference:
Saylor Academy. (2012). Chapter 9 Section 3: Perfect competition in the long-run. In Principles of Economics. Saylor Academy. doi: https://saylordotorg.github.io/text_principles-of-economics-v2.0/s12-03-perfect-competition-in-the-lon.html
Jasmine Matthews posted Apr 8, 2020 11:58 PM
2. What is the difference between variable and fixed costs, how do they change in short-run vs. long-run? Provide an example in healthcare.
“Variable costs are based on the amount of output, while fixed costs are the same regardless of production output” (Investopedia, 2019). In short-run variable costs vary with the quantity produced, and fixed costs do not vary with the quantity produced. In long-run there is no fixed cost, all costs are variable. An example of fixed costs in healthcare would be health insurance payments and an example of variable cost would be labor and supplies.
References:
Nickolas, Steven. (25 Apr 19). Variable cost vs fixed cost: what’s the difference? Retrieved from https://www.investopedia.com/ask/answers/032515/wh…
