normal profit

(noun)

The opportunity cost of an entrepreneur to operate a firm; the next best amount the entrepreneur could earn doing another job.

Examples of normal profit in the following topics:

  • Cost

    • Producers who desire to earn profits must be concerned about both the revenue (the demand side of the economic problem) and the costs of production.
    • Profits (Π) are defined as the difference between the total revenue (TR) and the total cost (TC).
    • If the entrepreneur is not earning a "normal profit" is some activity they will seek other opportunities.
    • The normal profit is determined by the market and is considered a cost.
    • A "normal profit" is an example of an implicit cost of engaging in a business activity.

  • Profit Maximization in the Short Run

    • At these break-even points the firm is earning a normal profit.
    • (Remember normal profits are included in the cost functions. )Between output levels QA and QC, the TR>TC.
    • Note that at point A (producing QA) the firm obtains a normal profit.
    • In Figure VII.5 the firm is earning above normal profits by producing at QH output.
    • If the price falls below CB, the firm will lose money, i.e. will earn less than normal profits.

  • Profits in Long Run Pure Competition

    • Remember "normal profits" are included in the cost functions.
    • If this were the case firms would earn less than normal profits and would have an incentive to leave the market.
    • If profits are below normal, firms exit the market.
    • Firm earn normal profits at this point and there is no incentive to enter or leave the market.
    • AR = AC; Firms earn a normal profit.

  • Imperfect Competition and Monopolistic Competition

    • Short run profit maximization is shown in Figure VIII.4.
    • In the long run, above normal profits will attract the entry of firms into monopolistic competition.
    • Below normal profits will encourage firms to exit.
    • Entry to and exit from the industry occur until the profits for each firm are normal, i.e. the AR = AC.
    • Since the demand is negatively sloped and AC is usually U-shaped, the point of tangency between AR and LRAC (normal profits) will lie to the left of the minimum cost per unit of output.

  • Production Outputs

    • Microeconomics assumes that firms and businesses are profit-seeking.
    • Economic Profit: The firm's average total cost is less than the price of each additional product at the profit-maximizing output.
    • Normal Profit: The average total cost equals the price at the profit-maximizing output.
    • In this case, the economic profit equals zero.
    • Shutdown: The price is below average variable cost at the profit-maximizing output.

  • Sources and Determinants of Profit

    • Consequently, the firm earns $25,000 in economic profit.
    • Economic profits may be positive, zero, or negative.
    • In the short run, a firm can make an economic profit.
    • An economic profit of zero is also known as a normal profit.
    • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

  • Monopoly

    • Maximum profits is occurs at the output level where TR >TR by the greatest vertical distance.
    • This occurs at output QB.Profits are reflected by the vertical distance, CR, or TR-TC.
    • This occurs at output QB.Profits are reflected by the vertical distance, CR, or TR-TC.
    • In the long run the monopolist might adjust the scale of plant, but BTE prevents other firms from entering and driving profits to normal.
    • Secondly, above normal profits will persist over time.

  • Profit Maximization Function for Monopolies

    • Monopolies have much more power than firms normally would in competitive markets, but they still face limits determined by demand for a product.
    • The monopoly's profits are given by the following equation:
    • Profits are represented by π.
    • This is the profit maximizing quantity of production.
    • Fourth, the monopoly profits from the increase in price, and the monopoly profit is illustrated.

  • Relationship Between Output and Revenue

    • Revenue, also known as turnover, is the income that a company receives from normal business activities, usually from the sale of goods and services.
    • Revenue is an important financial indiator, though it is important to note that companies are profit maximizers, not revenue maximizers.
    • The production of goods carries a cost, so companies want to find a level of output that maximizes profit, not revenue .
    • It is however, a profit maximizer, not an output or revenue maximizer.

  • Difference Between Economic and Accounting Profit

    • The term "profit" may bring images of money to mind, but to economists, profit encompasses more than just cash.
    • In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit.
    • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
    • Economic profit includes the opportunity costs associated with production and is therefore lower than accounting profit.
    • Economic profit also accounts for a longer span of time than accounting profit.