As far as I understand, neoclassical economics usually assume perfect competition which would rule out corporate profits. Is this true?
Is it true that neoclassical economics usually assumes that there are no profits?
byu/SuperbeDiomont inAskEconomics
Posted by SuperbeDiomont
2 Comments
This is a common misconception. The zero-profit condition is a zero economic profit condition that exists in the perfect competition model. It assumes that the total revenue of a firm minus its total opportunity cost equals zero. There is a difference between economic and accounting profit, as these firms would still have positive accounting profit.
Furthermore, the perfectly competitive model is just a model we use to reason from and compare certain scenarios against. As a real world market gets *closer* to being like perfect competition, as defined by its features (no barriers to entry, many firms, identical products, perfect information), the real world outcome gets *closer* to the perfect competition outcome.
> As far as I understand, neoclassical economics usually assume perfect competition
Not really, no. If anything, I’d say most models have a baseline of monopolistic competition (or have some other deviation from perfect competition like imperfect information, search frictions, etc).
I would say that most models will have zero *economic* profit, though, unless you’re explicitly assuming no free entry. Intuitively, free entry tells you that if one industry was abnormally profitable, people would enter that industry until profits equalized across industries (or firms or …). It’s mostly a no-arbitrage condition.
Remember, though, zero economic profit does not mean zero accounting profits. Economic profit is typically defined as accounting profits minus opportunity costs.