Profits in “Perfect” v. Actual Competition

“I learned in economics that in ‘perfect competition’ profits are zero, so any actual profits come from some kind of monopoly power. So how could profits be good?”

This question was asked of me by a student at a recent economics seminar hosted by the Institute for Humane Studies. The simple explanation is that while the model of perfect competition is helpful for understanding certain economic phenomena, its simplifying assumptions make it useless for understanding profit and loss in a real economy.

I explain more fully in “The imperfect assumptions of perfect competition,” published last December at Learn Liberty’s blog. A slice:

In the real world, profit is a signal of and reward for innovation. But innovation has no place in the model of perfect competition. Therefore, there is no room for profit in the model.

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