Normal profits – definition
There are many theories of profit in economics. Economists tend to start with Alfred Marshall’s concept of normal profit, which, he argued, was the residual gain to a firm’s owner as a result of contributing two benefits to the business. The first benefit to the business is the investment of the owner’s personal capital. The second benefit derives from the supply of what Marshall called ‘business power’ – which is the ability to organise business activities.
To ensure that an entrepreneur continues to provide these two inputs, a minimum reward will be required – namely, normal profit. Normal profit is, essentially, an opportunity cost – given that the reward must be marginally better than could be derived by supplying these inputs into an alternative endeavour.
Given that normal profit is seen as the necessary reward to enterprise as a factor of production it is possible to think of normal profit as a production cost. If so, then normal profit will be earned if the revenue generated from the sale of a quantity of goods or services (total revenue – TR) equals the cost of producing that quantity (total cost – TC) which covers the opportunity cost of all the factors used. In simple terms, when TC = TR normal profits will be made.
Super-normal profit (SNP) is any reward over and above normal profit.
The laissez-faire economic theory centers on the restriction of government intervention in the economy. According to laissez-faire economics, the economy is at its strongest when the government protects individuals' rights but otherwise doesn't intervene. The ...
What Is Adverse Selection? Adverse selection is a term that describes the presence of unequal information between buyers and sellers, distorting the market and creating conditions that can lead to an economic collapse. It develops ...
Explaining The K-Shaped Economic Recovery from Covid-19 A K-shaped recovery exists post-recession where various segments of the economy recover at their own rates or levels, as opposed to a uniform recovery where each industry takes the same ...
Does Public Choice Theory Affect Economic Output? Both on paper and in real life, there is a solid relationship between economics, public choice, and politics. The economy is one of the major political arenas after all. ...
Largest Retail Bankruptcies Caused By 2020 Pandemic As we know at this point, the COVID-19 pandemic has thrown major companies in the US and the world over into complete havoc. Many have filed for bankruptcy, with an ...
Identifying Speculative Bubbles and Its Effect on Markets Speculation plays an interesting role in economics and one that drastically affects markets. If you ever see "speculation" in this context, be sure to pay attention. It is ...