Normal profits

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.