…possibly laced with a good dose of Dunning-Kruger, so I’d appreciate it if people more edumacated in economics would point out if I’m missing something or drawing ignorant conclusions.
Anyway, I just finished slogging through the math-heavy section of my economics textbook that dealt with different forms of economies, most notably “pure competition”, “monopolistic competition”, “oligarchy”, and “pure monopoly”. This being the textbook I previously described, it did not contain any human beings and stressed economic efficiency a lot. And of course there’s only one system that produces both allocative and productive efficiency (meaning that resources in the system are allocated in the most “desirable” way, and that everything is produced in the cheapest possible way): the pure competition.
on the left is what an individual company’s curve would look like, on the right is the graph for the entire industry. Now, I’m mostly interested in the
right left chart. that dot saying P=MC=minimum ATC is the point at which production supposedly occurs in a company in a purely competitive economy. p=price of each unit of product, MC=marginal cost (i.e. the cost of producing and selling one more unit), ATC = average total (i.e. variable and fixed) cost cost, (i.e. average cost of each unit sold). so the point at which each of these companies produces is the point at which the price for each unit sold is exactly the same as the cost of producing it.
Think about this.
This means this company is making zero economic profit. It’s not supposed to make any, in the long term. If it did, that would mean it is producing at a point on the demand-curve above ATC, the difference being the profit. And you achieve efficiency only if you don’t produce above minimum ATC.
According to that model, profit is inefficient.
Now, the graph on the right claims that some profit is being made even with efficient production. That’s the orange part called “producer surplus”. How this producer surplus comes about out of a market made up by companies which all function like the one in the right chart, I don’t know, and that’s the part where I’d really love a real economist to step in an explain.
Anyway, back to the single company. The one that isn’t supposed to make any economic profit in the long-term. What human thought-process would make a person enter such a market, where businesses operate at zero economic profit? What person adds to their workload for no profit? Now, I can see that there’s a group-profit here. After all, things are being produced. And if you’re a laborer, then you’re getting paid, because your wage is part of the variable cost included in the ATC. But what’s in it for the individual entrepreneur? Wouldn’t it be more profitable to such a person to not go into business, and instead use that otherwise unprofitably invested time to, I don’t know, plant a vegetable garden to reduce food-costs instead?
The answer my textbook provides is about short-term fluctuations: sometimes demand for a product rises, which causes price to rise creating a short-term window of profitability. This is where more businesses enter the market, supply rises, and profit goes back down to non-profitable levels (for balance, sometimes demand shifts in the other direction and short-term losses result). But then what? The model seems to say that the companies then just go on blithely producing things at no profit (because shutting down is more expensive), but is that realistically really what would happen? A whole industry full of businesspeople not earning much of anything on their business, and being ok with that? I find that hard to believe. What seems to happen in the real world is that businesses attempt to prolong that small window of profitability for as long as possible. I can think of two common ways of doing this.
1)The window of profitability is created by an upward (or rightward on the graph) shift in demand. Creating a continuously shifting demand-curve would create a continuously open profitability window, even when more and more businesses enter the market or expand production capabilities to satisfy the demand. Thus, growth-economics and the never-ending race upwards until we run out of resources.
2)The window of profitability is profitable because the number of companies was sufficient for a lower demand, thus introducing a temporary shortage in producing businesses, and thus a price-spike. Businesses could attempt to keep that level by driving new businesses out of business, buying them, merging, etc. And once you’ve started that process, you have very little, AFAICT, that prevents that process from continuing past the original point and turning this “purely competitive” market into an oligopoly. Oligopolies, btw, are inefficient but very profitable.
So here’s two things. One, shouldn’t libertarians hate large profits, since they’re a blatant sign of economic inefficiency and a sign that the market isn’t working? And two, how exactly does a perfectly competitive market remain so, when there’s no rational motivation to create and maintain a business that makes no profit in the long-term?
I’m thinking an explanation of how the left chart leads to the right chart could probably answer those questions. But without that answer, it just doesn’t make any fucking sense.