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For supply curves that do slope up, it would be helpful to expand on the concept of producer surplus and economic rent in relation to short run, long run, marginal cost and average cost for the firm and industry.

Specifically, when is everything to the left of an upwards sloping supply curve considered producer surplus, economic rent or both?

Isn't there a bit of a problem with defining non-monopoly profit at equilibrium to be zero? In that case either most products are rarely at equilibrium, or almost all producers have a monopoly.

I think it's closer to say that marginal return in the long run approaches the point where its NPV falls below the expected NPV of a redeployment of the resources made available from ceasing production (discounted for risk and uncertainty).

Either you make a higher margin new version of the product, make a new product and/or sell the old product to someone with lower costs or cheat on costs (The price of a Hershey bar doesn't change, just the amount of chocolate in it. Banks start adding fees for formerly free services...).

PeterN "Isn't there a bit of a problem with defining non-monopoly profit at equilibrium to be zero?"

I'm not sure I understand your point. Remember that "zero profits" includes normal rate of return on capital. Accounting profits can be positive even when econ profits are zero. "Positive profits" would mean an super-normal rate of return on capital.

I think this article (link courtesy of Tyler Cowen) will explain things better than I could.


In the MR comments I found this gem from Tom Kelly:

"In the long run, there are no profits. Truly profitable companies make their profits by refusing to operate in the long run."

Peter - Context. it's all context.

The question the students have to analyze in this case is whether or not the Ontario government's policy of requiring direct wired in smoke alarms in all new buildings is a good one. In this case, the assumption that installing smoke alarms has a constant marginal cost is really not a bad one from the point of view of a simple calculation of the costs and benefits of smoke alarms.

Now one could argue that the cost of installing a smoke alarm costs isn't *really* a cost because of x/y/z - e.g. that the charge for the smoke alarm is, in part, economic rents enjoyed by the supplier of smoke alarms, and thus, from a social point of view, it's a transfer not a cost. That might make an interesting exam/assignment question.

But just calculating the total costs of installing smoke alarms, and doing a simple benefit cost calculation, is a good place to begin. Not all complications can be dealt with simultaneously, and the question given the students (not shown here) focuses more on demand than supply side market failures.

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