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Perfect information — All consumers and producers know all prices of products and utilities each person would get from owning each product. Homogeneous products — The products are perfect substitutes for each other, i.
Well defined property rights — These determine what may be sold, as well as what rights are conferred on the buyer.
Every participant is a price taker — No participant with market power to set prices Perfect factor mobility — In the long run factors of production are perfectly mobile, allowing free long term adjustments to changing market conditions.
Profit maximization of sellers — Firms sell where the most profit is generated, where marginal costs meet marginal revenue. Buyers make all trades that increase their economic utility and make no trades that do not increase their utility.
No externalities — Costs or benefits of an activity do not affect third parties. This criteria also excludes any government intervention. Zero transaction costs — Buyers and sellers do not incur costs in making an exchange of goods in a perfectly competitive market.
Non-increasing returns to scale and no network effects — The lack of economies of scale or network effects ensures that there will always be a sufficient number of firms in the industry. Anti-competitive regulation - It is assumed that a market of perfect competition shall provide the regulations and protections implicit in the control of and elimination of anti-competitive activity in the market place.
Normal profit[ edit ] In a perfect market the sellers operate at zero economic surplus: Normal profit is a component of implicit costs and not a component of business profit at all.
It represents the opportunity cost, as the time that the owner spends running the firm could be spent on running a different firm. The enterprise component of normal profit is thus the profit that a business owner considers necessary to make running the business worth her or his while i.
Only normal profits arise in circumstances of perfect competition when long run economic equilibrium is reached; there is no incentive for firms to either enter or leave the industry.
Economic profit does not occur in perfect competition in long run equilibrium; if it did, there would be an incentive for new firms to enter the industry, aided by a lack of barriers to entry until there was no longer any economic profit.
New firms will continue to enter the industry until the price of the product is lowered to the point that it is the same as the average cost of producing the product, and all of the economic profit disappears.
Normally, a firm that introduces a differentiated product can initially secure a temporary market power for a short while See "Persistence" in Monopoly Profit. At this stage, the initial price the consumer must pay for the product is high, and the demand for, as well as the availability of the product in the marketwill be limited.
In the long run, however, when the profitability of the product is well established, and because there are few barriers to entry   the number of firms that produce this product will increase until the available supply of the product eventually becomes relatively large, the price of the product shrinks down to the level of the average cost of producing the product.
When this finally occurs, all monopoly profit associated with producing and selling the product disappears, and the initial monopoly turns into a competitive industry. Profit can, however, occur in competitive and contestable markets in the short run, as firms jostle for market position. Once risk is accounted for, long-lasting economic profit in a competitive market is thus viewed as the result of constant cost-cutting and performance improvement ahead of industry competitors, allowing costs to be below the market-set price.
In uncompetitive markets[ edit ] A monopolist can set a price in excess of costs, making an economic profit shaded. Economic profit is, however, much more prevalent in uncompetitive markets such as in a perfect monopoly or oligopoly situation.
In these scenarios, individual firms have some element of market power: Though monopolists are constrained by consumer demandthey are not price takers, but instead either price-setters or quantity setters.
This allows the firm to set a price which is higher than that which would be found in a similar but more competitive industry, allowing them economic profit in both the long and short run.
In cases where barriers are present, but more than one firm, firms can collude to limit production, thereby restricting supply in order to ensure the price of the product remains high enough to ensure all of the firms in the industry achieve an economic profit.
In a single-goods case, a positive economic profit happens when the firm's average cost is less than the price of the product or service at the profit-maximizing output. The economic profit is equal to the quantity of output multiplied by the difference between the average cost and the price.
Government intervention[ edit ] Often, governments will try to intervene in uncompetitive markets to make them more competitive. Antitrust US or competition elsewhere laws were created to prevent powerful firms from using their economic power to artificially create the barriers to entry they need to protect their economic profits.
Microsoft ; after a successful appeal on technical grounds, Microsoft agreed to a settlement with the Department of Justice in which they were faced with stringent oversight procedures and explicit requirements  designed to prevent this predatory behaviour. With lower barriers, new firms can enter the market again, making the long run equilibrium much more like that of a competitive industry, with no economic profit for firms.
In a regulated industry, the government examines firms' marginal cost structure and allows them to charge a price that is no greater than this marginal cost.
This does not necessarily ensure zero Economic profit for the firm, but eliminates a "Pure Monopoly" Profit. The government examined the monopoly's costs, and determined whether or not the monopoly should be able raise its price and if the government felt that the cost did not justify a higher price, it rejected the monopoly's application for a higher price.
Although a regulated firm will not have an economic profit as large as it would in an unregulated situation, it can still make profits well above a competitive firm in a truly competitive market. This situation is shown in this diagram, as the price or average revenue, denoted by P, is above the average cost denoted by C.
However, in the long run, economic profit cannot be sustained. The arrival of new firms or expansion of existing firms if returns to scale are constant in the market causes the horizontal demand curve of each individual firm to shift downward, bringing down at the same time the price, the average revenue and marginal revenue curve.
The final outcome is that, in the long run, the firm will make only normal profit zero economic profit.
Its horizontal demand curve will touch its average total cost curve at its lowest point.In sharp contrast, the Osprey tilts its rotors to create a forward flight turboprop profile from an initial helicopter arrangement for V/TOL.
However, the Osprey is a hydraulic nightmare that simply may not work, if an engine goes out, the other engine must instantly spool up to cross shaft the other propeller or the entire aircraft flips over.
This already crashed Osprey #4 killing several. When a small business starts to expand, it has to be organized into a structure. The choice of structure will have a huge impact upon the success of the business.
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