Answer to Question #24285 in Economics of Enterprise for mohamed

Question

Why invest capita in purely competitive industries with equilibrium margins that
are razor thin and entrants that erode quasi profits? Suppose volume is not
exceptionally large, why then?

Answer 1

Purely competitive firms are price takers, price is equal to marginal costs, demand is perfectly elastic, i.e. constant and horizontal, the firms make small or zero economics profits. There is a sense, because you will earn small, but profit with the small risks, the market is efficient, there is no deadweight loss, and the competition itself leads the firms to create innovations, to decrease costs and to produce more efficient goods.