Answer to Question #178229 in Microeconomics for Vida okwae

Question

a.    Government price controls can short-circuit the market’s information transmission function. Discuss using appropriate figures.

b.    Using appropriate figures and charts, explain why earning zero economic profit is different from earning zero accounting profit. What are the implications of these profits to a perfectly competitive firm?

Answer 1

a. Price controls are government-mandated legal minimum or maximum prices set for specified goods. They are usually implemented as a means of direct economic intervention to manage the affordability of certain goods. Over the long term, price controls inevitably lead to problems such as shortages, rationing, deterioration of product quality, and black markets that arise to supply the price-controlled goods through unofficial channels.

b. Economic profit takes opportunity costs into account, while accounting profit does not. If a firm has zero economic profits, then it will have positive accounting profits. A perfectly competitive firm earns zero economic profit in the long run.