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Instructions:  View instructions on the section padlet.

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Instructions:  View instructions on the section padlet.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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Team:  Students will do one chapter per section.  View your assigned padlet at this link.

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Accounting Profit=Total revenue of a business - total outlays (aka explicit financial costs)
Economic Profit= Total revenue - explicit financial costs - implicit opportunity costs

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Average revenue = total revenue/quantity = price

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Profit margin= price - average cost

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Enter a new market if you expect to earn a positive economic profit, which occurs when the price exceeds your average cost.

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Exit the market if you expect to earn a negative economic profit, which occurs if the price is less than your average costs.

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Entry and Exit Decisions in the Long Run

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Entry and Exit Decisions in the Long Run

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Nice overview and video explaining the entry and exit decisions.

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Learning Objectives

Explain how entry and exit lead to zero profits in the long run

The line between the short run and the long run cannot be defined precisely with a stopwatch, or even with a calendar. It varies by industry and by specific business within an industry. The distinction between the short run and the long run is therefore more technical: in the short run, firms cannot change the usage of fixed inputs, while in the long run, the firm can adjust all factors of production.

In a competitive market, profits are a red cape that incites businesses to charge. If a business is making a profit in the short run, it has an incentive to expand existing factories or to build new ones. New firms may start production, as well. When new firms come into an industry in response to high profits, it is called entry.

Losses are the black thundercloud that causes businesses to flee. If a business is making losses in the short run, it will either keep limping along or just shut down, depending on whether its revenues are covering its variable costs. But in the long run, firms that are facing losses will downsize, reducing their capital stock, in hopes that smaller factories and less equipment will allow them to eliminate losses. Some firms will cease production altogether. When firms leave the industry in response to a sustained pattern of losses, it is called exit.

Why do firms cease to exist?

Can we say anything about what causes a firm to exit an industry? Profits are the measurement that determines whether a business stays operating or not. Individuals start businesses with the purpose of making profits. They invest their money, time, effort, and many other resources to produce and sell something that they hope will give them something in return. Unfortunately, not all businesses are successful, and many new startups eventually realize that their "business adventure" must end.

In the model of perfectly competitive firms, those that consistently cannot make money will "exit," which is a nice, bloodless word for a more painful process. When a business fails, after all, workers lose their jobs, investors lose their money, and owners and managers can lose their dreams. Many businesses fail.The U.S. Small Business Administration indicates that in 2011, 534,907 new firms "entered," and 575,691 firms failed.

Sometimes a business fails because of poor management or workers who are not very productive, or because of tough domestic or foreign competition. Businesses also fail from a variety of causes that might best be summarized as bad luck. For example, conditions of demand and supply in the market shift in an unexpected way, so that the prices that can be charged for outputs fall or the prices that need to be paid for inputs rise. With millions of businesses in the U.S. economy, even a small fraction of them failing will affect many people-and business failures can be very hard on the workers and managers directly involved. But from the standpoint of the overall economic system, business exits are sometimes a necessary evil if a market-oriented system is going to offer a flexible mechanism for satisfying customers, keeping costs low, and inventing new products.

How Entry and Exit Lead to Zero Profits in the Long Run

No perfectly competitive firm acting alone can affect the market price. However, the combination of many firms entering or exiting the market will affect overall supply in the market. In turn, a shift in supply for the market as a whole will affect the market price. Entry and exit to and from the market are the driving forces behind a process that, in the long run, pushes the price down to minimum average total costs so that all firms are earning a zero profit.

To understand how short-run profits for a perfectly competitive firm will evaporate in the long run, imagine the following situation. The market is in long-run equilibrium, where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC. No firm has the incentive to enter or leave the market. Let's say that the product's demand increases, and with that, the market price goes up. The existing firms in the industry are now facing a higher price than before, so they will increase production to the new output level where P = MR = MC.

This will temporarily make the market price rise above the average cost curve, and therefore, the existing firms in the market will now be earning economic profits. However, these economic profits attract other firms to enter the market. Entry of many new firms causes the market supply curve to shift to the right. As the supply curve shifts to the right, the market price starts decreasing, and with that, economic profits fall for new and existing firms. As long as there are still profits in the market, entry will continue to shift supply to the right. This will stop whenever the market price is driven down to the zero-profit level, where no firm is earning economic profits.

Watch It: The meaning of Zero Economic Profits

In this clip, Tyler and Alex explain why the "zero profit" can be misleading because zero profits simply mean that a firm is covering all of its cost, including enough to pay their ordinary opportunity costs and all of their labor and capital costs (meaning that they are making enough money to be satisfied). In other words, "zero profits" is what other people may call "normal profits."

Short-run losses will fade away by reversing this process. Say that the market is in long-run equilibrium. This time, instead, demand decreases, and with that, the market price starts falling. The existing firms in the industry are now facing a lower price than before, and as it will be below the average cost curve, they will now be making economic losses. Some firms will continue producing where the new P = MR = MC, as long as they are able to cover their average variable costs. Some firms will have to shut down immediately as they will not be able to cover their average variable costs, and will then only incur their fixed costs, minimizing their losses. Exit of many firms causes the market supply curve to shift to the left. As the supply curve shifts to the left, the market price starts rising, and economic losses start to be lower. This process ends whenever the market price rises to the zero-profit level, where the existing firms are no longer losing money and are at zero profits again. Thus, while a perfectly competitive firm can earn profits in the short run, in the long run the process of entry will push down prices until they reach the zero-profit level. Conversely, while a perfectly competitive firm may earn losses in the short run, firms will not continually lose money. In the long run, firms making losses are able to escape from their fixed costs, and their exit from the market will push the price back up to the zero-profit level. In the long run, this process of entry and exit will drive the price in perfectly competitive markets to the zero-profit point at the bottom of the AC curve, where marginal cost crosses average cost.

Let's take an example of this adjustment process. Suppose the National institutes of Health publishes a study indicating that consumption of corn leads to longer lives. The demand for corn products would increase causing an increase in the market price of corn. Farmers who are already growing corn would earn positive economic profits in the short run. In the long run, farmers would increase their acreage devoted to growing corn, perhaps by reducing their acreage of wheat. The increased market supply of corn would drive the market price of corn down to the average cost of producing corn. The lower corn price would reduce the profitability of growing corn. This process would continue until corn farmers were earning zero economic profits.

Long-Run Adjustment for a Constant Cost Industry

Perfect competition is often the result of a constant cost industry, where there is no advantage for a firm to be large. An increase in a firm's capital stock, simply shifts the firm's cost curves parallel to the right. The result is a long run industry supply curve which is very elastic. The following video will explain this with two graphs: one representing a typical firm and the other representing the market (or industry as a whole).

Watch It: Constant Cost Industry

Watch this video to see how a typical firm, as well as the industry which the firm is a part of, adjust to changes in demand for the product.

Glossary

constant cost industry:

an industry whose technology is such that there is no advantage to size; a large firm faces the same average costs as a small firm does.

entry:

the long-run process of firms entering an industry in response to industry profits

exit:

the long-run process of firms reducing production and shutting down in response to industry losses

long-run equilibrium:

where all firms earn zero economic profits producing the output level where P = MR = MC and P = AC

zero economic profits:

a firm is covering all of its cost, including the opportunity costs of its capital; i.e. normal accounting profits

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Explain how entry and exit lead to zero profits in the long run The line between the short run and the long run cannot be defined precisely with a stopwatch, or even with a calendar. It varies by industry and by specific business within an industry.

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Quick, easy read for a better understanding of barriers!

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What Are Barriers to Entry?

Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition. These can include high start-up costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector. Barriers to entry benefit existing firms because they protect their market share and ability to generate revenues and profits.

Common barriers to entry include special tax benefits to existing firms, patent protections, strong brand identity, customer loyalty, and high customer switching costs. Other barriers include the need for new companies to obtain licenses or regulatory clearance before operation.

Understanding Barriers to Entry

Some barriers to entry exist because of government intervention, while others occur naturally within a free market. Often, companies lobby the government to erect new barriers to entry. Ostensibly, this is done to protect the integrity of the industry and prevent new entrants from introducing inferior products into the market.

Generally, firms favor barriers to entry in order to limit competition and claim a larger market share when they are already comfortably ensconced in an industry. Other barriers to entry occur naturally, often evolving over time as certain industry players establish dominance. Barriers to entry are often classified as primary or ancillary.

A primary barrier to entry presents as a barrier alone (e.g., steep startup costs). An ancillary barrier is not a barrier in and of itself. Rather, combined with other barriers, it weakens the potential firm's ability to enter the industry. In other words, it reinforces other barriers.

Government Barriers to Entry

Industries heavily regulated by the government are usually the most difficult to penetrate. Examples include commercial airlines, defense contractors, and cable companies. The government creates formidable barriers to entry for varying reasons. In the case of commercial airlines, not only are regulations stout, but the government limits new entrants to limit air traffic and simplifies monitoring. Cable companies are heavily regulated and limited because their infrastructure requires extensive public land use.

Sometimes the government imposes barriers to entry not by necessity but because of lobbying pressure from existing firms. For example, a handful of states require government licensing to become a florist or an interior decorator. Critics assert that regulations on such industries are needless, accomplishing nothing but limiting competition and stifling entrepreneurship.

Natural Barriers to Entry

Barriers to entry can also form naturally as the dynamics of an industry take shape. Brand identity and customer loyalty serve as barriers to entry for potential entrants. Certain brands, such as Kleenex and Jell-O, have identities so strong that their brand names are synonymous with the types of products they manufacture.

High consumer switching costs are barriers to entry as new entrants face difficulty enticing prospective customers to pay the additional money required to make a change/switch.

Industry-Specific Barriers to Entry

Industry sectors also have their own barriers to entry that stem from the nature of the business as well as the position of powerful incumbents.

Pharmaceutical Industry

Before any company can make and market even a generic pharmaceutical drug in the United States, it must be granted a special authorization by the FDA. These Abbreviated New Drug Applications, or ANDAs, are hardly abbreviated. As of 2017, the median review time from receipt of application to approval was 37 months.

Moreover, just 18% of applications are approved in the first cycle. Each application is incredibly political and even more expensive. In the meantime, established pharmaceutical companies can replicate the product awaiting review and then file a special 180-day market exclusivity patent, which essentially steals the product and creates a temporary monopoly.

On average, it takes at least $2.6 billion to bring a new drug to market. Just as significantly, it can take up to 10 years for a drug to be approved for a prescription. Even if a startup company had the $2.6 billion to develop and test the drug according to FDA rules, it still might not receive revenue for 10 years. The FDA usually approves about one in 10 clinically tested drugs.

Electronics Industry

Consumer electronics with mass popularity are more susceptible to economies of scale and scope as barriers. Economies of scale mean that an established company can easily produce and distribute a few more units of existing products cheaply because overhead costs, such as management and real estate, are spread over a large number of units. A small firm attempting to produce these same few units must divide overhead costs by its relatively small number of units, making each unit very costly to produce.

Established electronics companies, such as Apple ( AAPL), may strategically build in switching costs to retain customers. These strategies may include contracts that are costly and complicated to terminate or software and data storage that cannot be transferred to new electronic devices. This is prevalent in the smartphone industry, wherein consumers may pay termination fees and face the cost of reacquiring applications when they consider switching phone service providers.

Oil and Gas Industry

The barriers to entry in the oil and gas sector are extremely strong and include high resource ownership, high startup costs, patents and copyrights in association with proprietary technology, government, and environmental regulations, and high fixed operating costs. High startup costs mean that very few companies even attempt to enter the sector. This lowers potential competition from the start. In addition, proprietary technology forces even those with high startup capital to face an immediate operating disadvantage upon entering the sector.

High fixed operating costs make companies with startup capital wary of entering the sector. Local and foreign governments also force companies within the industry to closely comply with environmental regulations. These regulations often require capital to comply, forcing smaller companies out of the sector.

Financial Services Industry

It is generally very expensive to establish a new financial services company. High fixed costs and large sunk costs in the production of wholesale financial services make it difficult for startups to compete with large firms that have scale efficiencies. Regulatory barriers exist between commercial banks, investment banks, and other institutions and, in many cases, the costs of compliance and threat of litigation are sufficient to deter new products or firms from entering the market.

Compliance and licensure costs are disproportionately damaging to smaller firms. A large-cap financial services provider does not have to allocate as large of a percentage of its resources to ensure it does not run into trouble with the Securities and Exchange Commission ( SEC), Truth in Lending Act ( TILA), Fair Debt Collection Practices Act ( FDCPA), Consumer Financial Protection Bureau ( CFPB), Federal Deposit Insurance Corporation ( FDIC), or a host of other agencies and laws.

What Are Some Barriers to Entry?

Why Would a Government Create a Barrier to Entry?

What Are Natural Barriers to Entry?

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Barriers to entry is an economics and business term describing factors that can prevent or impede newcomers into a market or industry sector, and so limit competition. These can include high start-up costs, regulatory hurdles, or other obstacles that prevent new competitors from easily entering a business sector.

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What new barriers have occurred in 2022 for businesses?

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Running your own business is a dream for many. You might have a talent you want to share, the next new hot product, or an identified niche market set to explode. However, for all your good intentions, there are new business barriers to entry that almost everyone faces. Some are easily rectified, while others will be a constant annoyance to your brand new business venture.

Unreliable Transaction Services

As a business, you rely on payments from customers. Those payments require facilitation between you as the merchant and your business bank account. Typically, large financial services providers such as Fidelity Information Services handle these. Still, there are some business types prominent facilitators class as risky. High risk merchant processing becomes necessary if operating a risky business. Risk businesses include CBD, vaping, pawnshops, and MLM ventures. Some of the best providers include Payment Cloud and Durango Merchant Services.

Poor Planning

Of course, your business venture is only as good as your plan. Because of consistently poor planning and strategy, only 25% of companies make it past 15 years of operation. Any successful business manager will tell you the foundation of success is consistently solid and reliable planning. Planning your business doesn't only cover what you will offer. You must compile a complete and comprehensive financial strategy. A good plan should include employee retention and loss predictions, profit and loss forecasts, market variability, and competition.

Difficulty Securing Funds

Further to planning, securing the necessary funds for a successful startup is more challenging than you might think. A bank loan may only go so far, and you need to immediately pay it back. It is, therefore, necessary to attract investors, and this is a complex task. You can hold seminars and conferences to outline your prospect. Or you can develop a successful crowdfunding campaign. However, all your options require thorough planning and adequate expertise. Additionally, you need to consider the long-term efficacy of short-term funding.

Existing Competition

No matter your venture, there will always be competition. And in almost all cases, there is existing competition that has been in business for a long time. Therefore, they may have cornered most of the market. Additionally, existing businesses may be subject to generous tax breaks and levies that allow them to operate at a reduced financial rate that isn't feasible for you. Then there's brand awareness and customer loyalty issues to consider. You need to identify and highlight reasons why a customer should switch from them to you.

Licenses and Regulations

Thankfully, we live in a regulated world. Depending on where you are located, regulations are enforced or lacking. And whether you agree with them, they exist for a reason. Usually, laws are upheld to protect the population. Protection could be physical or financial. For example, you need to be licensed to sell your organic home-brew cider. Licensing is dependent on the determination of a safe product for ingestion. In some cases, testing and regulations procedures can take some time to complete. You need to factor this into your business plan.

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5 Common New Business Barriers to Consider into 2022 - TheUrbanRealist

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Running your own business is a dream for many. You might have a talent you want to share, the next new hot product, or an identified niche market set to explode. However, for all your good intentions, there are new business barriers to entry that almost everyone faces.

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As a small business owner this makes me very happy!

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The Great Resignation could lead to a small business revolution.

Intuit, in its 2021 New Business Insights report, predicts 17 million new small businesses will be formed in 2022, a third consecutive record year for entrepreneurship.

The jump from working at big businesses to people launching their own comes as the pandemic has had dramatic effects on how people want to work. Some 83% of the people surveyed by Intuit who want to start a business said COVID-19 has accelerated their plans to start their own business. All totaled, the study spoke with 8,000 U.S. workers - and the accompanying Small Business Insights report surveyed 2,000 small business owners.

"When the pandemic hit, we saw an unprecedented number of new businesses formed as millions of people spotted new opportunities brought on by the 'new normal' or reevaluated their priorities," said Alex Chriss, executive vice president and general manager of Intuit's Small Business and Self-Employed Group. "Now, almost two years later, we're continuing to see this trend, as 2022 promises to deliver even more small business growth and prosperity."

Microbusinesses (those with between one and five employees and less than $50,000 in start-up capital) and small businesses play a critical, but often underappreciated, role in local economies, providing jobs and serving their communities. They're small individually, but collectively, they employ 41 million people and have a $5 trillion economic impact, says Erin Igleheart, program director of the Start:ME Accelerator Program at Emory University's Goizueta Business School.

Most of the startups in 2022 will be sole proprietorships, but Intuit predicts 5.6 million of those new small businesses will either incorporate or hire employees, topping the expected record of 5.3 million in 2021 (and the current existing record of 2020's 4.3 million).

Finding those employees, of course, will be a challenge, as major corporations plan to open their purse strings to retain talent. Base pay may increase by an average of 3.9% in 2022, according to The Conference Board's most recent wage survey of 240 companies. That's the largest projected hike since 2008. And firms like Goldman Sachs and JPMorgan Chase are preparing for big bonuses this year. Goldman is reportedly increasing its bonus pool by between 40% and 50% vs 2020, while JPMorgan is mulling a 40% increase.

To compete, small business owners plan to emphasize the close relationships with the owner(s), customers and a sense of belonging to the company. Some 44% say they plan to increase starting salaries. And to retain talent, 46% plan to increase existing pay, while 36% will offer larger bonuses. Affording those higher salaries might be a bit easier next year. Of the 8,000 U.S. workers surveyed by Intuit, 56% say they plan to spend significantly or somewhat more at small businesses over the next six months. Just 11% say they'll spend somewhat or significantly less at those companies.

The biggest barrier to benefiting from that increased desire to buy local for many small businesses is the lack of a website. And nearly 90% of existing small business owners say online sales will be an important source of revenue in the coming year, with 40% saying increasing those is their top priority for 2022.

As a result, would-be entrepreneurs rate building a website as being even more important than securing funding or setting up a business bank account as they plan their business. (Nearly 70% say they will fund their business from their personal savings.)

That's not to say funding isn't important, though. Nearly half of the burgeoning small business owners say they will apply for a small business loan. And Intuit says there really has never been a better time to do so.

"Fintech has greatly expanded the availability of funding for small businesses and for many entrepreneurs it represents a simpler, faster way to access capital," said Rania Succar, senior vice president of Intuit QuickBooks Money Offerings. "QuickBooks Capital, for example, leverages technology to help business owners that have been underserved by traditional financial institutions access the funds they need to sustain operations, invest in growth and thrive."

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The Small Business Economy is Set to Soar in 2022

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The Great Resignation could lead to a small business revolution. Intuit, in its 2021 New Business Insights report, predicts 17 million new small businesses will be formed in 2022, a third consecutive record year for entrepreneurship. The jump from working at big businesses to people launching their own comes as the pandemic has had dramatic effects on how people want to work.

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I like this visualization because it shows what kind of calculations to do when figuring out implicit opportunity costs, which consist of forgone wages and forgone interest.

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Businesses in a market are playing a game that never stops changing.  Chapter 15 teaches about how to get to the top you have to outsmart your competition as well as build an adaptable and reliable industry for your consumer.   At a given time you have a certain number of rivals, and you have to use good management to stay ahead of them while also being ready for the potential threat of new rivals entering your market.  Looking and a chart of the profit margin in your market can give you an indication of when you can expect more business to enter.   This Chapter highlights strategies for retaining market power and creating barriers for the entry of rivals in your industry.   From the entrepreneurial side it covers how to know when you should start a business using Economic profit instead of just Accounting Profit assessments. Then how to overcome barriers to entry in a market you're looking to enter.  

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Businesses in a market are playing a game that never stops changing.  Chapter 15 teaches about how to get to the top you have to outsmart your competition as well as build an adaptable and reliable industry for your consumer.   At a given time you have a certain number of rivals, and you have to use good management to stay ahead of them while also being ready for the potential threat of new rivals entering your market.  Looking and a chart of the profit margin in your market can give you an indication of when you can expect more business to enter.   This Chapter highlights strategies for retaining market power and creating barriers for the entry of rivals in your industry.   From the entrepreneurial side it covers how to know when you should start a business using Economic profit instead of just Accounting Profit assessments. Then how to overcome barriers to entry in a market you're looking to enter.  

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An accountant answers the question, “Where did my money go last year?” And so accountants focus on explicit financial costs, which are any outlays where money left your business, including rent, the wages you pay your workers, the cost of computers and furniture, and your electric bill.

By contrast, the goal of economic analysis is to help you make the best decision. Consequently, economic analysis emphasizes all of your costs, including both the explicit financial costs your accountants tally up, and the implicit opportunity cost of your forgone opportunities.

As a rule, whenever you see news reports about corporate profits, or when you read a company’s profit and loss statement, they’re reporting their accounting profits. But if you’re trying to decide whether it’s worth starting a business, you want to focus on economic profits. The same advice applies to managers of existing companies, who should only stay in business if they expect to earn positive economic profits.

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Cost per unit, calculated as your firm’s total costs (including fixed and variable costs) divided by the quantity produced

Average cost = total costs / quantity = (fixed costs / quantity) + (variable costs / quantity)

Notice that your average cost per unit is based on your total costs, and so includes both your fixed costs—such as the cost of land and capital equipment, an entrepreneur's monetary investments, and any other expenses that don’t vary with the quantity you produce—as well as your variable costs—such as the cost of variable inputs, like raw materials, electricity, and worker time. Your fixed costs include the opportunity cost of the entrepreneur’s time and money.

In the long run of free entry and exit markets, average costs will be the dominant factor determining prices.

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While the details may be different for your business, the U-shaped pattern is quite common, and it reflects the influence of two key forces:

Spreading your fixed costs: As you start to increase production from a low level, your average costs typically fall initially. This is because you have to pay for fixed costs just to set up your business. If you only produce a small quantity, these fixed costs constitute a large cost per unit sold. But as you produce a larger quantity, the fixed cost gets “spread” over more and more units, and so it becomes smaller on a per-unit basis. This decline in fixed costs per unit often leads average costs to fall.

Rising variable costs: Eventually, your variable costs become the more important component of average costs. At some point your average costs rise as inefficiencies make it increasingly expensive to increase your production. This is driven by rising input costs per unit, which may reflect overtime payments, diminishing marginal product reducing the productivity of your workers, coordination problems, or other inefficiencies. And so at some point, your average costs will typically rise as the quantity you produce increases.

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This visualization illustrates how you can spot profit opportunities on a graph, showing your firm’s demand curve (remember that it’s also your average revenue curve) and average costs. Your profit margin per unit is the price you’ll charge (shown on the firm demand curve) less your average costs. Graphically, this means that for any given quantity, your profit margin per unit is the gap between your firm’s demand curve and its average cost curve. Any time you see a firm’s demand curve lying above the average cost curve, there’s an opportunity to make economic profits.

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Short run: The horizon over which the production capacity, and the number and type of competitors you face, cannot change. That is, you face a fixed set of competitors with given production capacity, and your job is simply to outcompete these existing rivals. Short-run analysis is useful for deciding the quantity your company should supply, given today’s market price.

Long run: The horizon over which you, or your rivals, may expand or contract production capacity, and new rivals may enter the market or existing firms may exit. Long-run dynamics determine what is sustainable. Long-run analysis is useful for planning purposes, such as planning how much to invest in a new plant and equipment for a business expansion, or planning whether to launch your new start-up. There is no simple answer to the question of how long the long run is; When you’re operating a refinery, it may take a decade for companies to enter or exit the market. But if you’re running a roadside lemonade stand, a neighbor could set up a table just across the street any minute.

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Market Entry and Exit Shift Your Firm's Demand Curve

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Market Entry and Exit Shift Your Firm's Demand Curve

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On the left side of the visual, we see the entry of new rivals into your market will decrease your profits because you’ll sell a smaller quantity (due to the decrease in demand) at a lower price with a lower profit margin (because you have less market power). Less market power means that your firm’s demand curve is flatter, or relatively more elastic.

On the right side of the visual, we see that as rivals exit the market your profits will recover, because you’ll sell a larger quantity (due to the increase in demand) at a higher price (as you exploit your enhanced market power). More market power means that your firm’s demand curve will be steeper, or relatively more inelastic.

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The Effects of Free Entry and Exit on Profit Margins 

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The Effects of Free Entry and Exit on Profit Margins 

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Free entry means new rivals will continue to enter as long as economic profits are positive, with each additional competitor pushing profits down a bit further until there's no longer any incentive(economic profits=0) for new businesses to enter the market. At the point where economic profits equal zero, the price is equal to average cost.

On the flip side, the possibility that your rivals may exit means that if your industry is currently unprofitable, it’s likely that business conditions will eventually improve. Why? Those rivals facing the prospect of ongoing losses will follow the Rational Rule for Exit and leave the market. With fewer competitors, the profitability of the remaining businesses will improve. Competitors will leave an unprofitable market until the economic profits eventually return to zero, at which point price is equal to average cost.

Taken together, the dynamics of businesses freely entering and exiting a market—and of existing rivals expanding and contracting—tends to push economic profits to zero in the long run. That is, in the long run, if businesses are free to enter and exit, then price equals average cost.

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When there are no factors making it particularly difficult or costly for a business to enter or exit an industry. Free entry tends to eliminate desirable outcomes, for instance, positive economic profits are a desirable opportunity but economic profits tend towards zero in the long-run of free entry markets.

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Two main types:
Forgone interest and forgone wages

When you take money from your savings to start a business, you will not earn interest on that sum any longer. If you leave your job, you obviously will not get paid.

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Free Entry Continues Until Price Equals Average Cost

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Free Entry Continues Until Price Equals Average Cost

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To see why the two curves have to just touch, realize that if any part of the demand curve lies above average costs, there’s a profit opportunity—because price exceeds average costs. Free entry will continue until this opportunity is eliminated. And, if the demand curve lies entirely below average costs, then incumbent businesses must be making losses because price is always below average costs. Incumbent businesses will exit until these losses are eliminated. When the two curves touch, the best a company can do is make zero economic profits, which is a long-run equilibrium, because it’ll lead the industry to neither expand (through entry) nor contract (through exit).

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Heres a video breakdown of the prisoners dilemma I found useful.

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Obstacles that make it difficult for new firms to enter a market. Incumbent firms devote a lot of resources to preventing new rivals from entering their respective markets. Different firms employ different strategies, but they all rely on four big idea:

1. Demand-side: find ways to create customer lock-in

2. Supply-side: develop unique cost advantages

3. Regulatory: mobilize the government to prevent entry

4. Deterrence: convince potential entrants they will be crushed

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One way to prevent new entrants from succeeding is to prevent them from winning over your existing customers. That’s why you want to create customer lock-in.

Switching costs: An impediment that makes it costly for customers to switch to buying from another business, effectively locking in customers. For instance, around three out of four iPhone owners who upgrade their phones stick with another iPhone because if you switch to an Android phone, you’ll have to re-buy all of your favorite apps plus go through extra hassle transferring your data.

Reputation and goodwill keep customers loyal. Firms work to build a good reputation with their clients as it helps to lock them in. This goodwill gives incumbents an advantage over potential entrant who have yet to build those relationships.

Network effect: Occurs whenever a product becomes more useful when others use it. Savvy managers work to create these network effects, because they make it harder for potential entrants to compete with them. For instance, when more people use Amazon’s website, it becomes more useful, because past customers write reviews that are helpful to future customers.

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It’s also possible to deter the entry of new rivals by gaining cost advantages that newcomers cannot easily replicate. If your firm has lower costs than a marginal supplier(the company on the cusp of entering or exiting), then you’ll continue to earn economic profits, even if the marginal supplier is earning zero profit. Even better, if your cost advantages are large enough, they can effectively deter entry. After all, few entrepreneurs want to enter a market where they’ll have to compete with an incumbent with lower costs. Your lower costs signal that you’re more likely to survive a price war, as you can get by on a somewhat smaller profit margin for much longer than a rival can endure continuing losses.

A firm must develop unique cost advantages so that other firms cannot easily copy.

Learning by doing means that experience yields efficiency gains.

Learning by Doing: as a firm gains experience making a product, they learn how to streamline their operations, making them more efficient. If you’re the incumbent, this process of learning by doing can yield a pretty robust advantage over newcomers whose inexperience means that they’re stuck with higher costs. This insight also has strategic implications. It says to aggressively seek market leadership in order to gain a self-reinforcing advantage: If you’re the market leader, you produce the most, which gives you the most opportunities for learning by doing, which will lower your costs the most, further reinforcing your position as a market leader.

The benefits of mass production can keep small firms from being competitive entrants.
Mass production is often more efficient than producing in small batches, although it often involves big fixed costs on machinery. These big upfront costs can make it difficult for new entrants to compete. In particular, if small businesses lack the funding to make these investments, they’ll operate at a substantial cost disadvantage relative to the large incumbent firms.

The benefits of mass production can keep small firms from being competitive entrants.
Developing cheaper ways to make existing products can be at least as valuable as developing new products because it’ll give you a lasting cost advantage over potential entrants.

Relationships with suppliers can get you cheaper inputs
As you develop close relationships with your suppliers, you’ll become a valued business partner. As you grow, your business will become even more important to their success, making them invested in your success. You’ll be able to use your buying power to demand discounts on your raw materials, wholesale goods, and other inputs.

Access to key inputs can freeze your competitors out.
By tying up key inputs—often through long-term contracts—incumbents can make it difficult for new entrants to succeed. In some cases, these contracts run afoul of regulators. But in others, the effects are less direct. For instance, tech giants like Google and Facebook are able to tie up key programming talent, making it difficult for start-ups to compete.

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The government can be a major force shaping whether new companies can enter your market. Sometimes the government regulates who can enter a market because it’s trying to counter some kind of market failure, and sometimes it does so in response to politicians being swayed by corporate lobbyists.

Patents give you the right to be the only producer.
A patent effectively grants a company a monopoly for the patented product. The government grants this right in order to provide an incentive for innovation.

Regulations make it difficult for new businesses to enter your market.

Government regulations can make it difficult to start a new business. For example, in some countries, it can take more than three months to step through the dozen or so separate procedures required to register a new business, and the associated fees can easily add up to more than a year’s income. In the United States, the barriers aren’t so high, as there are only half-a-dozen steps, and they can be completed within a week. That said, there are some sectors of the U.S. economy that the government regulates closely—often for good reason.

Compulsory licenses can limit competition.
The government directly regulates entry in some markets, and you’ll need a government-issued license to be allowed to do business. For instance, you can’t operate a radio or TV station without a license from the Federal Communications Commission. These licenses are both scarce and a hassle to obtain, which serves as a barrier to entry.

Lobbying can create new regulatory barriers.
Many big businesses spend millions of dollars lobbying governments. Sometimes, they do this in ways that serve the common good. But often it’s because they hope to convince the government to implement rules that will interfere with the plans of potential new entrants. You might be surprised to sometimes see incumbent firms arguing for more government regulations in their industry. The incumbents are hoping that more intense regulation—while costly—will insulate them from competition.

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Finally, entry deterrence strategies work by convincing potential rivals that if they do enter your market, you’ll respond so aggressively that they’ll wish they had never entered. Whether potential entrants choose to believe they'll be crushed by incumbents depends on the credibility and follow through of the threat.

Build excess capacity so that your rivals expect fierce competition.
It’s worth considering building more production capacity than you actually need. This does three things. First, it makes it clear that you have the capacity to increase your production and cut prices if new rivals enter the market. Effectively you’re showing that you’ve invested in the infrastructure to start a price war, and win. Second, it’s especially useful to invest in excess capacity if it means incurring higher fixed costs today that will enable you to produce at a lower marginal cost in the future. Your lower marginal costs effectively commit your company to charging a low price if a new rival enters. As a result, your potential rivals should expect fierce competition if they do enter. And third, when this excess capacity takes the form of irreversible sunk costs, you’re effectively committing your company to stay in the market to fight potential rivals, because you can’t deploy those resources elsewhere.

Financial resources signal that you can survive a costly fight.
A well-stocked war chest can be a powerful signal to a potential entrant that perhaps they’re better off finding some other company to fight. For instance, in mid-2018, Apple had an extraordinary $244 billion of cash on hand as a signal that it has the resources to survive a long and costly fight to maintain its market share.

Brand proliferation can ensure there are no profitable niches for a rival to exploit.
Have you ever noticed that the breakfast cereal aisle at the supermarket is about a mile long, featuring dozens of varieties catering to just about every conceivable whim? It’s all about entry deterrence. In reality, those dozens of different cereals are made by only a handful of companies. Their brand proliferation is a deliberate strategy to ensure that there’s almost no way for a new entrant to find a profitable niche.

Your reputation for fighting can be helpful, too.

A company with a fierce enough reputation will scare potential competitors away.

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Demand-side strategies to combat customer lock-in.
One of the biggest hurdles Tesla faced in winning over car buyers was the network effects of traditional gasoline-powered vehicles. For Tesla’s potential customers, the absence of a network of places to recharge their cars would make owning an electric car a real headache. To overcome this lock-in, Tesla subsidized the installation of thousands of electric car chargers in parking lots, hotels, and restaurants. But developing a nationwide network is a bigger problem than any individual company can solve, and so Musk invited other companies to use Tesla’s patented technology. That might sound odd, because this move made it easier for other electric car manufacturers to compete with Tesla. But Musk understood the value of building network effects. He figured that a thriving electric-car industry would lead to a vibrant network of charging stations and repair shops, and without this network, Tesla couldn’t succeed.

Supply-side strategies to overcoming cost disadvantages.
Previous generations of entrepreneurs had been intimidated by the cost advantages of incumbent automakers—particularly in research and development and manufacturing. But Musk partnered with experienced British car manufacturer Lotus to reduce his up-front costs and got a low-volume luxury model (called the Roadster) to market quickly. Testing the waters with the roadster provided Tesla an opportunity for learning by doing, and the company was able to refine its technology and reduce its costs before trying to scale up with a less expensive model for the mass market. Although Tesla only produced and sold 2,500 Roadsters in the company’s first four years, the company demonstrated that it could successfully build desirable electric cars. That early success convinced additional investors that Tesla was worth backing. Tesla used that infusion of funds to invest in research that created unique costs advantages, allowing it to produce lower-cost models that would eventually reach more customers.

Use regulatory strategies to your advantage.
Tesla saw the government’s concern with the environment as an opportunity. After all, electric cars are far kinder to the environment than gas-guzzlers. Tesla positioned itself to benefit from government policies to reduce emissions. It received a $465 million loan under an Energy Department program to boost fuel-efficient vehicles. Buyers of Tesla’s and other electric cars received federal subsidies of up to $7,500, plus some states chipped in further rebates of up to $5,000 as well as access to carpool lanes and cheaper electricity. Even though Tesla’s cars were expensive, these subsidies—and similar ones in foreign countries—made them more affordable. In recent years, Tesla has joined with other electric carmakers to lobby the government to continue these tax credits. As a newcomer to the car market, Tesla held one more ace: It could decide where to locate its new factories, and it recognized that state governments would compete vigorously to become its new home. Before deciding where to build its battery factory, Musk negotiated with Texas, Arizona, New Mexico, and California, and finally settled on Nevada—but only after the state government offered $1.3 billion in tax breaks and other incentives.

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Here's an article that kind of proved my initial thought train on the internet lowering barriers for entrepreneurs. There are a lot of hidden barriers that come with setting up shop in the web.

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The Internet is all about democratization -- a place where the small guy can effectively fight against the giants and hope to win. Examples such as Google, Facebook, Twitter, Amazon, and eBay, among others bear testimony to that fact. And since two of the names in that list of five are e-commerce players, there is a belief that e-commerce, as an industry, has negligible barriers to entry. Here's why.

In an earlier article, I had shown how one could set up an e-commerce website in one day. And I know people who have set up e-commerce websites in the past and can do it in under an hour. Think about physical retail: you could not even have set up the signboard for a retail outlet in an hour. But this kind of thinking leads us to the wrong conclusions.

This is the crux of the issue. While setting up a physical store could be regarded as the time when one got into the retail business, I think that in the case of e-commerce, setting up a website cannot be seen in the same vein.

Of course, you need customers to have a business. I know several people who have turned e-commerce entrepreneurs overnight, and the next morning they have invested in pay-per-click advertising. It got traffic flooding to their doorstep. Some of it, naturally, converted.

Having Customers Is Also Not Enough to Call Yourself a Business

Traditionally, if you had a shop, and if you had customers, you could certainly be labeled as, "in business." But if you have had to pay customers (directly or indirectly) to come and buy from you, then it is more like a charade. And a charade does not make a business.

The earlier part of this article has focused on defining what is not an e-commerce business. Let us now talk about what is an e-commerce business. Given the specific economies involved in the e-commerce business, I think that one of the first characteristics of an e-commerce business would be a repeat customer. If a customer has a reason to come to you one more time, then you are showing characteristics of being a business.

You Are an E-commerce Business When You Have a Low Bounce Rate

Sure, you may have compelled visitors to visit you with an effective pay per click strategy. But once they visit, if many of them are encouraged to look around, then you are a serious destination. You could achieve this visitor interest with your choice of products, images, descriptions, or with any other instrument of customer engagement.

You Are an E-commerce Business When You Do Not Lose Money on Every Transaction

I find it irritating that the only way to be in the e-commerce business is by losing money. Getting money from investors rather than customers seems to me like a perilous route. Sure, one could think of it as a necessary evil to get started - but only to get started. I am not a fan of e-commerce professionals who think do not think twice flinging discounts and goodies in the general direction of the customer with a hope to capture so much market share that someday they will be very valuable, as opposed to profitable.

Conclusion

Though it might seem like there are no barriers to entry in e-commerce, I think that notion is erroneous. Just like e-commerce has opened up a new paradigm of existence, I think that new rules should be applied to evaluate e-commerce. And unless an e-commerce business can demonstrate some of the characteristics I have talked about, we cannot call it a business. And when we do apply my yardstick, then an e-commerce business is mighty difficult to set up.

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Barriers to Entry in the Ecommerce Business

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The Internet is all about democratization -- a place where the small guy can effectively fight against the giants and hope to win. Examples such as Google, Facebook, Twitter, Amazon, and eBay, among others bear testimony to that fact.

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Entry, Exit and Long-Run Profitability - How to get ahead in the Market

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Entry, Exit and Long-Run Profitability - How to get ahead in the Market

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exit and long-run profitability - how to get ahead in the market

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‎Think Like An Economist: Entry, Exit and Long-Run Profitability - How to get ahead in the Market en Apple Podcasts

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‎Programa Think Like An Economist, ep. Entry, Exit and Long-Run Profitability - How to get ahead in the Market - 23 ago 2021

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The Forces that Shape Market Entry Strategies

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The Forces that Shape Market Entry Strategies

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This was a really good visual that helped me better understand strategies for entering a market.

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Accounting profit = Total revenue-
Explicit financial costs

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Economic profit = Total revenue
Explicit financial costs - Implicit
opportunity costs

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Average revenue= Total revenue/Quantity= Price

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Short run is The horizon over the production capacity,
and the number and type of competitors you face cannot change.

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The horizon over which you, or your rivals, may expand or contract production capacity, and new rivals may enter the market or existing firms may exit.

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https://youtu.be/Xx5-O8kDMvU

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Long-run economic profit for perfectly competitive firms | Microeconomics | Khan Academy

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https://youtu.be/dD_9KBz3pN0

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Short run and long run equilibrium and the business cycle | AP Macroeconomics | Khan Academy

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https://www.cnbc.com/amp/2021/10/18/carl-icahn-says-the-market-over-the-long-run-will-certainly-hit-the-wall-because-of-money-printing.html

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Longtime activist investor Carl Icahn said Monday that the U.S. markets could see major challenges over the long term in the face of excessive money supply and rising inflation.

"In the long run we are certainly going to hit the wall," Icahn said Monday on CNBC's " Fast Money Halftime Report." "I really think there will be a crisis the way we are going, the way we are printing money, the way we are going into inflation. If you look around you, you see inflation all around you and I don't know how you deal with that in the long term."

The Federal Reserve and Congress have unleased trillions of dollars in stimulus to rescue the economy from the Covid-19 pandemic. The central bank's balance sheet swelled by more than $3 trillion amid its open-ended quantitative easing program, while the government has allocated over $5 trillion in stimulus to support Americans through the health crisis.

Icahn was adamant about not making a market timing call, but he believes one day over the long term the markets will pay the price for these policies.

On the back of these unprecedented stimulus programs, the S&P 500 has rapidly wiped out the pandemic-induced losses and rebounded to a new high. The equity benchmark is up more than 19% in 2021, sitting just 1.4% below its all-time high reached early September.

The massive money supply has partly contributed to rising price pressures in the economy. Inflation ran at a fresh 30-year high in August amid supply chain disruptions and extraordinarily strong demand.

The core personal consumption expenditures price index, which excludes food and energy costs and is the Fed's preferred measure of inflation, increased 0.3% for the month and was up 3.6% from a year ago.

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Carl Icahn says the market over the long run will certainly 'hit the wall' because of money printing

# data[].attributes.attachment_link.description
Longtime activist investor Carl Icahn said Monday that the U.S. markets could see major challenges over the long term in the face of excessive money supply and rising inflation. "In the long run we are certainly going to hit the wall," Icahn said Monday on CNBC's " Fast Money Halftime Report."

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Carl Icahn says the market over the long run will certainly 'hit the wall' because of money printing

# data[].attributes.subject
Carl Icahn says the market over the long run will certainly 'hit the wall' because of money printing

# data[].attributes.body
https://www.cnbc.com/amp/2021/10/18/carl-icahn-says-the-market-over-the-long-run-will-certainly-hit-the-wall-because-of-money-printing.html

# data[].attributes.attachment_link.readable_text
Longtime activist investor Carl Icahn said Monday that the U.S. markets could see major challenges over the long term in the face of excessive money supply and rising inflation.

"In the long run we are certainly going to hit the wall," Icahn said Monday on CNBC's " Fast Money Halftime Report." "I really think there will be a crisis the way we are going, the way we are printing money, the way we are going into inflation. If you look around you, you see inflation all around you and I don't know how you deal with that in the long term."

The Federal Reserve and Congress have unleased trillions of dollars in stimulus to rescue the economy from the Covid-19 pandemic. The central bank's balance sheet swelled by more than $3 trillion amid its open-ended quantitative easing program, while the government has allocated over $5 trillion in stimulus to support Americans through the health crisis.

Icahn was adamant about not making a market timing call, but he believes one day over the long term the markets will pay the price for these policies.

On the back of these unprecedented stimulus programs, the S&P 500 has rapidly wiped out the pandemic-induced losses and rebounded to a new high. The equity benchmark is up more than 19% in 2021, sitting just 1.4% below its all-time high reached early September.

The massive money supply has partly contributed to rising price pressures in the economy. Inflation ran at a fresh 30-year high in August amid supply chain disruptions and extraordinarily strong demand.

The core personal consumption expenditures price index, which excludes food and energy costs and is the Fed's preferred measure of inflation, increased 0.3% for the month and was up 3.6% from a year ago.

Enjoyed this article?
For exclusive stock picks, investment ideas and CNBC global livestream
Sign up for CNBC Pro
Start your free trial now

# data[].attributes.attachment_link.title
Carl Icahn says the market over the long run will certainly 'hit the wall' because of money printing

# data[].attributes.attachment_link.description
Longtime activist investor Carl Icahn said Monday that the U.S. markets could see major challenges over the long term in the face of excessive money supply and rising inflation. "In the long run we are certainly going to hit the wall," Icahn said Monday on CNBC's " Fast Money Halftime Report."