A firm will earn economic profits whenever, given the prices of all its inputs and outputs, it can produce at a cost less than or equal to the market price. If this is not the case, then there must be some products that could be profitable but isn’t being done because it would require input prices higher than those prevailing in the market.
PRODUCING AT MARKET PRICE
Furthermore, if a firm can produce at the market price with input costs higher than those prevailing in the market, it is earning economic profits. This means that some other firms are not producing because they cannot earn economic profits given their inputs prices and output prices.
In short, overproduction of input or underproduction of output leads to unintended consequences for both producers and consumers by generating losses on one side or gains on the other.
These losses come about as a result of supply exceeding demand for goods produced using these particular inputs; while these gains occur as a result of demand exceeding supply for goods produced using these specific outputs. When this happens, there will be more suppliers competing to sell their products but fewer buyers demanding them.
