Economist claims that the equilibrium position of each firm in a perfect competitive industry the equilibrium can be at the point where D=P=MR=AR.At that point you can notice that the equilibrium market price, average revenue per unit is exactly equal to the average cost per unit. This means that AR*Q is exactly equal to AC*Q which means that TR is the same as TC. Since cost and revenue are the same this means that there is no profit so why would any producer stay in business if there is no profit to be gained from doing so? With aid of diagram.
In a perfectly competitive industry, producers may indeed earn zero economic profit in the long run. However, while it may seem counterintuitive, there are still reasons why producers would choose to stay in business despite not making any profit.
To understand this, let's analyze the situation using a diagram. Consider a graph with quantity (Q) on the x-axis and both price (P) and average cost (AC) on the y-axis.
In perfect competition, the market demand curve (D) is perfectly elastic and represents the price at which firms can sell their products. This demand curve is also the average revenue (AR) and the marginal revenue (MR) curve since each additional unit sold fetches the same price.
The equilibrium position occurs where the market demand curve (D) intersects the marginal cost (MC) curve, determining the quantity produced (Qe) and the price (Pe) at which the industry operates. At this equilibrium, the average revenue per unit (AR) is exactly equal to the average cost per unit (AC), meaning AR = AC.
Now, let's consider the total revenue (TR) and total cost (TC) curves. TR is represented by the rectangle formed by the price (P) and the quantity (Q). TC is represented by the area below the average cost curve (AC) and the quantity (Q).
Since AR*Q is exactly equal to AC*Q (as AR = AC), the total revenue (TR) is the same as the total cost (TC). This implies that there is no economic profit, as TR - TC = 0.
However, it's important to note that there is a distinction between economic profit and accounting profit. While there may not be any economic profit in a perfectly competitive industry, producers can still earn a return on their investment in the form of normal or accounting profit. Accounting profit considers only explicit costs, such as wages, rent, and raw materials, while economic profit also takes into account implicit costs, including the opportunity cost of the producer's resources.
Producers may choose to stay in business despite not making any economic profit for several reasons:
1. Existing investments: Producers may have made significant investments in physical assets, such as factories or machinery, and continuing operations allow them to at least cover their non-recoverable costs.
2. Technological advancements: In competitive markets, firms are incentivized to innovate and improve their production processes, leading to cost reductions. If costs decrease over time, it is possible for firms to earn positive economic profit in the future.
3. Risk and uncertainty: Some producers might prefer a stable and predictable income, even if it means earning zero economic profit, rather than trying new ventures or risking losses in other industries.
4. Non-monetary benefits: Being the owner of a business may bring non-financial benefits, such as personal satisfaction, status, or control.
In summary, even though producers in a perfectly competitive industry may not earn economic profit in the long run, they might still choose to remain in business due to existing investments, potential technological advancements, risk aversion, or non-monetary benefits.