In the long run, accounting profits will be greater than economic profits for firms in a perfectly competitive industry. Yes or no and why?
Dreary, Accounting profit= if its revenues exceed the accounting cost the firm “pays” for those inputs Economic profit= arises when its revenue exceeds the total (opportunity) cost of its inputs Economic profit does not occur in perfect competition in long run equilibrium (as MR=MC). Once risk is accounted for, long-lasting economic profit is thus viewed as the result of constant cost-cutting and performance improvement ahead of industry competitors, or an inefficiency caused by monopolies or some form of market failure. Therefore…I assume yes.
Yes, because in long run your economic profit will be zero. Only profit the firm in perfectly competitive environment will be normal profit.
Yes… In the long-run PC make no economic profit but they will make accounting profit otherwise they won’t be in business for long.
Both of you are correct. It’s a good way of differentiating between the two types of profits. Would the following be correct? 1) In the long run, economic profits will be greater than accounting profits for a monopolist? Yes or no? 2) In the long run, economic profits will be greater than accounting profits for a firm in a monopolistic competition? Yes or no?
Considering that in the long rung MR-MC=0 should always hold… I assume that economic profit will be always lower than that accounting profit. So it is No in both question.
Can you think of a business senario where the accounting profit is less than the economic profit?
I just consider the fact that accounting profits tend to be higher than economic profits as they omit certain implicit costs, such as opportunity costs (implicit wages, interest foregone…) I think you can take as an example all companies which decide to closed down the business
In theory, it is possible for accounting profits to be greater than economic profits. That happens when you have some forms of implicit revenues that are not accounted for in an accounting statement. I haven’t thought about any truly practical examples, but I guess if you subjectively place a higher value on a company’s goodwill, or you give more weight to the dollar revenues depending on how the revenue was generated! I don’t know, I’m just thinking aloud. But the answer to both questions above is no. In the long run, economic profits will not be greater than accounting profits for a monopolist, but a monopolist will earn above zero profit, while all others earn zero economic profit. That’s what I think.
make that: In theory, it is possible for accounting profits to be less than economic profits…
However, “In the long run we are all death” John Maynard Keynes