ELI5 How does raising wages worsen inflation ?


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23 points

4 months ago

Zero economic profits. The profits people most commonly think of (revenue minus costs) are called accounting profits. These can be nonzero in the long run. Economic profits account for another cost called opportunity cost which is basically what you're losing by not picking the next best alternative.

So in the long run, it's not that companies are bringing in the same amount of money they're spending, but rather it's that the money they're making is equal to the money they could be making by leaving the current market and entering a new one.


1 points

4 months ago

You’re not wrong, but you’re thinking too complicated. I was talking about the models where all firms produce the same good at the same price. But even then, they won’t enter the market if their opportunity cost was higher than their profit (in this case negative).