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I get intuitively how if there are a lot of firms selling identical products the firm demand curve would be perfectly elastic, and I also get the definition of economic profit.

Say a firm is making $50000 in accounting profit. Economic profit is accounting profit - opportunity cost. Why, in the long run, would the economic profit go to 0 but in the short run it would be positive. Wouldn't the opportunity cost be the same in short run and long run?

Secondly, I don't really intuitively get the link between perfect competition and no entry or exit costs. I thought it would be because if you are entering you are producing identical goods to other existing firms so there are no additional cost in research and whatnot, but then production should still cost money as in if you are entering you are going to have to buy a machine to produce this good. In that case wouldn't that be entry cost? And when you leave the market, you might have to demolish a factory or something, so wouldn't that be an exit cost?

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Say a firm is making $50000 in accounting profit. Economic profit is accounting profit - opportunity cost. Why, in the long run, would the economic profit go to 0 but in the short run it would be positive. Wouldn't the opportunity cost be the same in short run and long run?

In short-run shocks to demand might push total revenue to be higher than total cost (including opportunity cost). Hence in short-run there is possibility for economic profit but it is not a guarantee. In fact in short-run there might be also economic loss, depending on the nature of demand shock. So even if opportunity cost is the same there are these possibilities.

What eliminates profit in the long-run is entry of new firms which will compete the profits away (alternatively if there is economic loss firms will leave which leads to less competition until profits are equal to zero).

Secondly, I don't really intuitively get the link between perfect competition and no entry or exit costs. I thought it would be because if you are entering you are producing identical goods to other existing firms so there are no additional cost in research and whatnot, but then production should still cost money as in if you are entering you are going to have to buy a machine to produce this good. In that case wouldn't that be entry cost?

Entry costs are fixed and sunk ex-post. Buying a sewing machine to make shirt is not an entry cost. An example of entry cost would be to spend money on lets say special permit like taxi drivers have to do in some countries or something of that nature (e.g. maybe precondition of getting any customers in some industry is to always start with big marketing campaign that announces the company is present when business is set up etc). It is some one-time purchase that is required to start a business, but then the purchase itself does not contribute to production (other than it enabled the start of the business). Exit costs are mirror image of entry cost.

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  • $\begingroup$ Oh, I see where I went wrong. Thank you for your explanation! $\endgroup$
    – Kevin
    Dec 21, 2022 at 14:05
  • $\begingroup$ @Kevin you are welcome, if this answer answered your question consider accepting it $\endgroup$
    – 1muflon1
    Dec 21, 2022 at 23:06

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