Levels of Profit

Statement

A firm can earn one of three levels of profit, measured against total cost inclusive of opportunity (implicit) costs:

• Normal profit — the minimum level of profit a firm must earn to remain in operation in the long run; here total revenue equals total cost ($TR = TC$), so economic profit is zero.
• Subnormal profit — a level of profit below normal profit; here total cost exceeds total revenue ($TC > TR$), so the entrepreneur earns less than in the next best alternative.
• Supernormal profit — a level of profit above normal profit; here total revenue exceeds total cost ($TR > TC$).

Notes

The key to these terms is that “cost” includes implicit cost — the opportunity cost of the resources the entrepreneur commits. Normal profit is therefore not zero accounting profit: it is the return that exactly matches what those resources would earn in their next best use, so the firm is indifferent between staying and leaving. Supernormal profit is a surplus over that benchmark and is what attracts new entrants where barriers to entry are low; persistent subnormal profit is what eventually drives a firm to exit, as set out in the shut-down conditions.