Introduction
In explaining the model of pure competition, we assumed for simplicity that all the firms in an industry had the same cost curves. Competition, as a result, only involved entrepreneurs entering and exiting industries in response to changes in profits caused by changes in the market price. This form of competition is important, but it is just a game of copycat because firms entering an industry simply duplicate the production methods and cost curves of existing firms in order to duplicate their above-normal profits. In this type of competition, there is no dynamism and no innovation, just more of the same.
By contrast, the most dynamic and interesting parts of competition are the fights between firms over the creation of new production technologies and new products. Firms have a strong profit incentive to develop both improved ways of making existing products and totally new products. To put that incentive in context, recall one fact that you just learned about long-run equilibrium in perfect competition. When each firm in a purely competitive industry has the same productive technology and therefore the same cost structure for producing output, entry and exit assure that in the long run every firm will make the exact same normal profit.
Directions
According to the basic model of pure competition, in the long run all firms in a purely competitive industry will earn normal profits. If all firms earn only a normal profit in the long run, why would any firms bother to develop new products or lower-cost production methods? Explain.
Thesis Statement: While the basic model of pure competition assumes that all firms in a purely competitive industry will earn normal profits in the long run, firms still have incentives to develop new products or lower-cost production methods due to various reasons, including market differentiation, competitive advantage, and the pursuit of above-normal profits.
Introduction: The basic model of pure competition suggests that in the long run, all firms in a purely competitive industry will earn only normal profits. However, this raises the question of why firms would bother to invest resources in developing new products or lower-cost production methods if they can only expect to earn normal profits. This essay aims to explore the reasons behind firms’ incentives to engage in innovation and technological advancements despite the assumption of normal profits in the long run.
I. Market Differentiation:
Developing new products or improving existing ones allows firms to differentiate themselves from competitors in the market.
By offering unique features, superior quality, or innovative designs, firms can attract a larger customer base and gain a competitive edge.
Differentiation can lead to increased customer loyalty, allowing firms to charge higher prices and earn above-normal profits.
II. Competitive Advantage:
Developing new products or lowering production costs can provide firms with a competitive advantage over their rivals.
By introducing innovative technologies or production methods, firms can reduce costs, increase efficiency, and improve productivity.
Competitive advantage enables firms to offer products at lower prices, thereby capturing a larger market share and generating above-normal profits.
III. Pursuit of Above-Normal Profits:
While the basic model assumes that firms earn normal profits in the long run, there are instances where firms strive to achieve above-normal profits.
By investing in research and development (R&D) or adopting cost-saving techniques, firms can create opportunities for higher profitability.
These efforts can lead to breakthrough innovations, monopolistic control over a specific product or market segment, or obtaining patents and licensing agreements that generate additional revenue streams.
IV. Technological Advancements:
Firms are driven by the desire for progress and the pursuit of technological advancements.
Developing new products or improving production methods contributes to technological innovation and economic growth.
Firms recognize that technological advancements can lead to long-term benefits for society, as well as enhance their own reputation and brand image.
Conclusion:
While the basic model of pure competition suggests that firms will only earn normal profits in the long run, there are several reasons why firms still engage in developing new products or lower-cost production methods. Market differentiation, competitive advantage, the pursuit of above-normal profits, and the drive for technological advancements serve as strong incentives for firms to invest resources in innovation. These efforts not only benefit individual firms but also contribute to economic progress and societal welfare. Therefore, despite the assumption of normal profits, firms continue to strive for dynamism and innovation within competitive markets.