Profit as Cost versus Profit as Surplus over Cost: A Case Study on Varian's "Intermediate Microeconomics"

Abstract

On the analysis of Varian’s textbook on Microeconomics, which I take to be a representative of the standard view, I argue that Varian provides two contrary notions of profit, namely, profit as surplus over cost and profit as cost. Varian starts by defining profit as the surplus of revenues over cost and, thus, as the part of the value of commodities that is not any cost; however, he provides a second definition of profit as a cost, namely, as the opportunity cost of capital. I also argue that the definition of competitive profit as the opportunity cost of capital involves a self-contradictory notion of opportunity cost.

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[Alternative summary] This paper is a critique of the standard conception of the relation between competition and profit and takes Varian as a representative case. Varian starts defining profit as the surplus of revenues over cost: profit is made by buying cheap and selling dear. But the he stumbles on the fact that selling-price cannot be different from cost-price under competition. As Varian views it, competition annihilates the profit margin. This means that, in the general competitive equilibrium, all the goods must be bought and sold at their value, wich Varian takes it to mean that profit cannot exist in competition. This carries the implication that the notion of competitive profit is a contradiction in terms, for, to the extent that competition prevails, there can be no surplus of selling-price over cost-price and, as long as there is susch a divergence, competition does not prevail. I contrast this standard conception of Varian with Classical Economics, where competition equalizes the profit rate. In Classical Economics, profit is not originated in exchange, but in production and the contradictions that plague Varian treatment do not arise. Standard Micro Theory should have not ignored this way.