Supernormal profit (also known as abnormal profit or economic profit) is the profit a business earns that goes beyond the normal profit level. Normal profit is the minimum amount of money needed to keep a business operating in its current industry.
The formula for this profit is: Supernormal Profit = Total Revenue – Total Costs (including normal profit).
Key Characteristics:
- Normal profit is considered an opportunity cost, meaning it is the basic return needed to keep the owner interested in running the business.
- Supernormal profit happens when total revenue is greater than all economic costs.
- It often acts as a signal for new companies to enter the market over time.
- It provides extra funds for things like research, new equipment, and business growth.
Profit Types Explained:
- Normal profit: The minimum return required to stay in business.
- Supernormal profit: The extra money left over after all costs are paid.
- Subnormal profit: When the business earns less than the minimum required return, leading to losses.
Market Structures and Supernormal Profit:
- Perfect Competition: Supernormal profit is temporary because new companies will enter until it disappears.
- Monopoly: High barriers to entry allow a company to keep earning supernormal profits over the long term.
- Monopolistic Competition: Companies may earn supernormal profit briefly, but it usually disappears as competitors enter.
- Oligopoly: Companies may sustain supernormal profit depending on how difficult it is for new companies to compete.
Why It Matters:
Supernormal profit is a sign of market power. It shows that a company has the ability to set prices above its production costs. It is often a result of innovation, high efficiency, or the ability to prevent other businesses from entering the same market.