A cab operator appears to be making positive profits in the long run? Does this violate the competitive model?

Question

Why or why not?

Answer 1

In the real world, no. In the moronic world of so-called "perfect competition" they would say it shouldn't happen. He ought to make enough to cover his "salary" and that's all.

Be advised that, at the highest levels of the economics community, this Perfect Competition model is being debated daily. Most of the younger economists coming up today don't take it seriously anymore, but for the benefit of your (probably older) professor, just go ahead and say what he wants to hear.

Answer 2

Warren Buffett should be enough of an example to prove that the competitive model is an interesting academic concept, but not entirely practical.

Think of the competitive model like a perfect circle, in a world where we only have squares. You can approximate the shape of the circle by grouping a bunch of tiny squares together in a circular pattern, but it won't quite be a perfect circle unless you have an infinite number of squares.

The competitive model would be perfect if we had an infinite number of people and/or businesses and an infinite amount of time, but we don't. Therefore, we only get an approximation of the theory in real life with plenty of opportunity to make real, economic profits that exceed opportunity costs.

It's tough to tell if the cab driver actually generates profit beyond his opportunity cost because we can never know for sure exactly what that opportunity cost was. But, in the short run, if the cabby is happy with his pay relative to the time he puts into it, peace out.

Answer 3

This is impossible, both theoretically and practically. Remember that the term "economic profit" is so complex and has a very broad scope, but it ignores such crucial things as profitablility (the rate of profit as compared to sales or capital invested or so forth). If you look at the taxi driver issue from that point of view, you'll easily find that he can never make true positive economic profits over the long run.