Zero profit condition

Under the zero-profit condition (or shortly zero profit , Eng. Zero-profit condition ) is understood in economics , the long-term equilibrium situation in which companies in a market no (economic) profit generate more. From the point of view of price theory , this means: the marginal costs and average costs are identical.

Demarcation

The distinction between economic and accounting profit is important. The economic profit is always lower than the accounting profit, which in the zero profit situation may still be positive. Economic profit also includes implicit costs (see opportunity costs ). A company with zero economic profit is in the same position by investing its money in any market as it is by investing its money elsewhere.

Profit is the difference between revenues and costs. The economic costs already include the opportunity costs, particularly the time and money that the company owner has invested in his business. So the zero profit condition already includes all proceeds that reward the owner for his time and investment.

Explanation

The zero gain condition is an important part of neoclassical theory . In the long run a situation will arise in a market in which companies do not make a profit. If positive profits were still achieved, this would attract new competitors into the market (no barriers to market entry ); on the other hand, if there were losses, some companies would withdraw from the market.

Zero profit is a condition for long-term competitive equilibrium. At a price at the level of the operating optimum , the companies are in a zero-profit situation (see long-term lower price limit ). All companies aim to maximize profits , but assuming full competition , profit in equilibrium is zero.

Neoclassicism doesn't just examine perfect markets . In the case of a monopoly or monopoly competition , it is entirely conceivable that economic gains are positive.

Example: insurance market

An insurance company offers the following contract: in the event of damage, you receive an insurance sum at a price . The price must also be paid if no damage occurs. The probability of damage is , accordingly, no damage occurs with the counter-probability . The company then has an expected profit of: ${\displaystyle I}$ ${\displaystyle p\cdot I}$ ${\displaystyle \pi }$ ${\displaystyle 1-\pi }$

${\displaystyle E\Pi =\pi (p\cdot I-I)+(1-\pi )(p\cdot I)}$.

In the zero profit condition this means that the profit function is set to zero, resulting in:

${\displaystyle {\begin{aligned}E\Pi &=\pi (p\cdot I-I)+(1-\pi )(p\cdot I){\stackrel {!}{=}}0\\E\Pi &=-\pi \cdot I+p\cdot I{\stackrel {!}{=}}0\Rightarrow p=\pi \\\end{aligned}}}$

In the zero profit situation on the insurance market, the price of the insurance must correspond to the probability of damage (the premium is then called actuarially fair).

Individual evidence

1. ↑ Varmaz, Armin. Profitability in the banking sector: identification, quantification and operationalization of value-driving factors. Springer-Verlag, 2007. S: 151
2. ↑ Nicholas Gr. Mankiw, Mark P. Taylor: Economics . Thomson Learning Services (January 25, 2006). ISBN 978-1844801336 . P. 280.
3. ↑ Pindyck, Robert S., and Daniel L. Rubinfeld. Microeconomics. Pearson Deutschland GmbH, 2009. p. 389.