|
A. Suppose industry demand and supply yield an equilibrium price
P at which a firm's economic profit is zero.
1. Step 1
indicates an increase in demand to D' causing economic profit.
2. Market
entry is relatively easy and this profit draws in new firms
increasing supply to S', Step 2, and
economic profit disappears.
3. This
automatic purely competitive adjustment causes equilibrium long run economic
profit for pure
competition to
be zero.
4.To many, zero long run economic profit
represents an ideal economic model as all the company
earns is a normal return
on investment.
|
Purely Competitive Adjustment Causing New
Normal Beginning with the economic expansion caused by WWII, demand for U.S. manufactured goods increased dramatically causing
demand to increase from D to D.' Profits maximization resulted.
These manufactures shared their excess profits with unionized workers and wages
for all workers increased dramatically.
It took Germany, England and Japan many years to repair war damaged
manufacturers and bring an end to U.S. manufacturers monopoly power.
Serious competition from foreign
manufacturers began with automobiles and steel increased supply
from S to S'. Rust belt industries lost all their excess profits and
some incurred a loss as supply increased to S" (not shown). Wage give backs began
and many other workers found themselves with stagnating wages.
Companies used technology and outsourcing to be more competitive and
this continues to put pressure on wages.
This also happened in the finance industry with competition coming
from foreign banking and cheap Internet trading. Their attempt to
increase D for their services with exotic product like derivatives has not worked out
well as of
07/01/10.
As a result, the high standard enjoyed in the U.S. will grow very
slowly as we share the wealth with people from around the world. We may
even have to give a little back because of energy dependence and recent
decadence. But we will still enjoy the highest standard of living in the
industrialized world. Technology will continue to make our lives better
md the best things in life will continue to be free. |
