[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

In some cases, supplies of inputs are inelastic in the short run but elastic in the
long run. An example is payment for the use of a building. In the short run, the supply
of buildings does not depend on the return, and hence payments for the use of the
building are rents, in the economist’s sense. But in the long run, the supply of buildings
does depend on the return—investors will not construct new buildings unless
they receive a return equal to what they could obtain elsewhere. So the “rent” received
by the building’s owner is not really a rent, in the sense in which economists use
the term.
Thus, when economists say that competition drives profits to zero, they are
focusing on the fact that in competitive equilibrium, price equals marginal cost for
every firm producing. A company will not increase profits by expanding production,
and firms outside the industry will not gain by entering it. We say that
competition drives profits to zero at the margin.
Case in Point
ENTERING THE PAINTING BUSINESS AND
OPPORTUNITY COSTS
Individuals often forget to include opportunity costs when they are making important
decisions, as the following story illustrates.
House painting is a summer business, for days that are hot and long, using available
low-skilled labor on vacation from high school and college. As a way of picking
up some cash, Michael decided to start Presto Painters during the summer, after
taking introductory economics.
Just getting started involved some substantial fixed costs. Michael ran the business
out of his parents’ home so he had no costs for office space. His fixed costs
ended up looking like this:
Fixed costs
Used van $5,000
Paint and supplies $2,000
Flyers and signs $1,200
Business cards and estimate sheets $ 500
Phone line and answering machine $ 300
Total $9,000
Michael went to work drumming up business. He took calls from potential customers
and knocked on doors, made estimates of what he thought it would cost to
paint someone’s home, and then offered them a price. Of course, he was in direct competition
with many other painters and had to meet the competition’s price to get a job.
Michael found that the going rate for labor was $10 per hour. In the real world,
labor is not the only variable input required for house painting—there are also the
ACCOUNTING PROFITS AND ECONOMIC PROFITS ∂ 169