Answer to Question #219497 in Macroeconomics for emy

Question

Explain in Detail why would a firm should remain in an industry in which it makes an
economic profit of zero.

Answer 1

When economists say zero economic profit they actually mean normal profit. When a firm is making zero economic profits, the managers, lenders, owners, and workers are all earning equilibrium returns. It also implies that in the long run equilibrium no one would be better off leaving the industry and no one would be better off entering the industry. In other words, it's zero economic profit only in the sense that labor and capital are earning no more than elsewhere in the economy.

In other words, when economic profit is zero, a firm is earning the same as it would if its resources were employed in the next best alternative. Also in the zero profit equilibrium, the firm's revenue compensates the owner for the time and money they spend to keep the business going.