normal profit

(noun)

The opportunity cost of an entrepreneur to operate a firm; the next best amount the entrepreneur could earn doing another job.

Examples of normal profit in the following topics:

  • Cost

    • Producers who desire to earn profits must be concerned about both the revenue (the demand side of the economic problem) and the costs of production.
    • Profits (Π) are defined as the difference between the total revenue (TR) and the total cost (TC).
    • If the entrepreneur is not earning a "normal profit" is some activity they will seek other opportunities.
    • The normal profit is determined by the market and is considered a cost.
    • A "normal profit" is an example of an implicit cost of engaging in a business activity.

  • Profit Maximization in the Short Run

    • At these break-even points the firm is earning a normal profit.
    • (Remember normal profits are included in the cost functions. )Between output levels QA and QC, the TR>TC.
    • Note that at point A (producing QA) the firm obtains a normal profit.
    • In Figure VII.5 the firm is earning above normal profits by producing at QH output.
    • If the price falls below CB, the firm will lose money, i.e. will earn less than normal profits.

  • Profits in Long Run Pure Competition

    • Remember "normal profits" are included in the cost functions.
    • If this were the case firms would earn less than normal profits and would have an incentive to leave the market.
    • If profits are below normal, firms exit the market.
    • Firm earn normal profits at this point and there is no incentive to enter or leave the market.
    • AR = AC; Firms earn a normal profit.

  • Profit and Value

    • Profit is equal to a firm's revenue minus its expenses, while value is the present value of the firm's current and future profits.
    • A) The value of a firm is the sum of its expected profits; B) The value of a firm is the sum of the PV of its current and future profits; or C) The value of a firm is its current profit.
    • Normal profit represents the total opportunity costs (both explicit and implicit) of a venture to an investor, whereas economic profit is the difference between a firm's total revenue and all costs (including normal profit).
    • The value of a firm is linked to profit maximization.
    • Profit is equal to a firm's revenue minus its expenses, while value is the present value of the firm's current and future profits.

  • Production Outputs

    • Microeconomics assumes that firms and businesses are profit-seeking.
    • Economic Profit: The firm's average total cost is less than the price of each additional product at the profit-maximizing output.
    • Normal Profit: The average total cost equals the price at the profit-maximizing output.
    • In this case, the economic profit equals zero.
    • Shutdown: The price is below average variable cost at the profit-maximizing output.

  • Sources and Determinants of Profit

    • Consequently, the firm earns $25,000 in economic profit.
    • Economic profits may be positive, zero, or negative.
    • In the short run, a firm can make an economic profit.
    • An economic profit of zero is also known as a normal profit.
    • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

  • Using Financial Statements to Understand a Business

    • This division separates the earning into normal earnings, also known as core earnings, and transitory earnings.
    • The idea is that normal earnings are more permanent and therefore more relevant for prediction and valuation.
    • Normal earnings are also separated into net operational profit after taxes (NOPAT) and net financial costs.
    • Two types of ratio analysis are analysis of risk and analysis of profitability:
    • Profitability analysis: Analyses of profitability refer to the analysis of return on capital.

  • Profit Maximization Function for Monopolies

    • Monopolies have much more power than firms normally would in competitive markets, but they still face limits determined by demand for a product.
    • The monopoly's profits are given by the following equation:
    • Profits are represented by π.
    • This is the profit maximizing quantity of production.
    • Fourth, the monopoly profits from the increase in price, and the monopoly profit is illustrated.

  • Profit-Maximization Pricing

    • Profit maximization analysis is the process by which a firm determines the price and output level that returns the greatest profit.
    • Profit maximization is the short run or long run process by which a firm determines the price and output level that returns the greatest profit.
    • Revenue is the amount of money that a company receives from its normal business activities, usually from the sale of goods and services (as opposed to monies from security sales such as equity shares or debt issuances).To obtain the profit maximising output quantity, we start by recognizing that profit is equal to total revenue (TR) minus total cost (TC).
    • The profit-maximizing output level is represented as the one at which total revenue is the height of C and total cost is the height of B; the maximal profit is measured as CB.
    • This output level is also the one at which the total profit curve is at its maximum.

  • Marginal Analysis

    • If, for example, an item has a marginal cost of $1.00 and a normal selling price of $2.00 the firm selling the item might wish to lower the price to $1.10 if demand has waned.
    • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
    • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero.
    • In this case, marginal profit plunges to zero immediately after that maximum is reached.
    • This series of cost curves shows the implementation of profit maximization using marginal analysis.