Subnormal profit (also known as an economic loss or abnormal loss) occurs when a business’s Total Revenue (TR) is less than its Total Cost (TC). In this situation, the business is not making enough money to cover its costs, resulting in a negative profit.
Formula:
Subnormal Profit = Total Revenue – Total Cost < 0
Key Concepts:
- Normal profit is the minimum amount of money needed to keep a business running in its current activity.
- Subnormal profit means the firm is earning less than its opportunity cost.
Example:
If a firm earns £80,000 in revenue but spends £100,000 in costs, the result is -£20,000, which is a subnormal profit (a loss).
Decisions and Implications:
- Short-run: If the price (P) is higher than the Average Variable Cost (AVC), the firm may continue operating to cover some costs. If P is lower than AVC, the firm should shut down immediately.
- Long-run: If losses continue, firms will leave the industry. This reduces the overall supply, which eventually helps raise market prices until the remaining firms can earn at least normal profits again.