Michael Hurst
1 min readSep 1, 2020

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Zero economic profit is a concept that describes the economics of an industry, not an individual firm. As some firms achieve profit, others losses, and the net over time is a wash. In the early days of a new competitive industry, some firms will make profit. Others enter and lower the price for everyone. At equilibrium, the net is zero.

You could have titled your article as "Why do firms continue to operate with zero profit?" That is a completely different issue. Zero economic profit describes the supply/demand, price/quantity dynamics of a competitive market. It is important to understand the concept correctly, as there is great confusion about profits. Profits only come from market power. Firms in a competitive market cannot set price, or quantity, they are constrained by the market price, and set their production where MR = MC. In a competitive market MR - price. When a firm achieves market power, it can set the price and reduce quantity to achieve profit. It is this important distinction that is the crux of the whole zero-profit argument.

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Michael Hurst
Michael Hurst

Written by Michael Hurst

Economist and public policy analyst, cyclist and paddler, and incorrigible old coot.

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