Don't quote me, it is ages since I had my economics book open last time, but if I recall correctly, there is a confusing terminology here. Zero profit means in the context of economice profits that exceed risk adjusted return. That is, even in a perfect market, in the models you are allowed to pay a decent return to your capital, but not more. These extra profits are called almost as confusingly "rents" in economics. That's why "rent-seeking" is considered bad even if it is fine that your landlord collects rents from you. Two different things and one word.
Your answer and the others reinforce why I allways avoided everything with economics in university. The definitions and models are (mostly) just weird.
I would intuitively define a free market, as a (virtual) place, where people can trade freely (goods or labour) without restrictions. And they profit, if they are better off with the trade, than without. The more free the market, the less restrictions.
It's actually too oversimplified to be a great model for most things. Extend your intuition to imagine that you have perfect competition where there are infinitely many identical goods all competing to the lowest price either no differentiation, and people will price at zero profit. To extend that to the real world requires more and more complications like the time value of money etc
"Extend your intuition to imagine that you have perfect competition where there are infinitely many identical goods all competing to the lowest price either no differentiation, and people will price at zero profit. "
But this is not reality.
I doubt doing abstractions like these are helpful in understanding anything, when the base is so far off.
Right, never said that was attainable or good. The point is that some people view perfect free markets as the ideal, and this is a move towards that, so people might view the market as getting g fixed rather than being broken.
Basic economics. The problem with basic economics is that all models are wrong and there are not in fact infinitely many perfectly fungible producers of identical commodities in perfect competition with eachother, but under perfect competition, nobody makes economic profits.
Profit is market inefficiency, whether due to missing information or inadequate competition. Perfect efficiency drives prices down to the marginal cost of a good or service. Micro 101 stuff.
Zero profits in economic models are usually in the context of economic profits, not accounting profits. So yeah, kind of (though there's risk adjustment needed, but when you start bringing in real world stuff like that your econ 101 supply curve/demand curve abstraction really starts breaking down, there are far more sophisticated economic tools for that). Perfect competition doesn't also really exist so we're just being guided by the math.
"Profit is market inefficiency" Profit is motive to do something.
No profit = no motive.
"perfect efficiency" means "no market" in this definition. It's a make believe process that will literally never happen. Companies that work with perfect efficiency close their doors.
Well, sorta but um no. If no profit includes a situation where everyone involved is paid at least enough that they are willing to do the work, then there is by definition motive to do the work.
These economic models are simplistic to the point of stupidity. But motivation to do the work can be totally priced in to the equations as a cost of doing business. Profit beyond that is what must, in the models, end up at zero to be efficient.
Not necessarily the stock market, but yes of course all models are wrong. Some are useful though, including these models. You can see that a pharma company with a government granted monopoly with patent power has high gross margins, while a more undifferentiated retail firm like walmart has far lower gross margins. That understanding can be drawn from using these models to understand how businesses will behave under a set of given assumptions (they want to maximize profit etc)
Yep. Perfect markets dont actually exist in any realistic way, and the US constitution itself deliberately breaks perfect markets by providing for patents.
Where does this conclusion come from?