Normal profit is the minimum amount of profit a business needs to earn to stay in operation. It acts as the opportunity cost for the business owner, representing the return they could have earned elsewhere with their time and money.

Key points:

• Calculated as: Total Revenue minus Total Costs (this includes both visible expenses and implicit costs).
• It is considered part of a firm’s total cost, often called normal cost.
• When a firm earns exactly normal profit, its economic profit is zero.
• If earnings are above normal profit, it is called supernormal profit, which encourages new businesses to enter the market.
• If earnings are below normal profit, it is called subnormal profit, which leads businesses to leave the market.

Importance: This is the critical threshold that determines whether a business will continue to exist or shut down in the long run.