Normal profits, supernormal profits and losses — Edexcel A-Level Economics A
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Normal profits, supernormal profits and losses explained
Profit is the difference between total revenue and total cost, including the opportunity cost of the entrepreneur's own resources.
Read the full explanation
Normal profit is the minimum return needed to keep the entrepreneur in the industry, so it is treated as a cost: when total revenue equals total cost including normal profit, economic profit is zero and the firm is said to earn normal profit. Supernormal (abnormal) profit is any return above that minimum, arising when average revenue exceeds average total cost at the profit-maximising output where marginal revenue equals marginal cost. Losses occur when total revenue is below total cost, so average revenue lies below average total cost.
Your focus
- State the meaning of normal profit, supernormal profit and loss in terms of total revenue and total cost.
- Identify each profit position from average revenue and average total cost data or a diagram.
- Calculate supernormal profit or loss from given revenue and cost figures.
Normal profits, supernormal profits and losses exam tips
Marking Points
- Defines normal profit as the minimum return required to keep the entrepreneur in the industry, and recognises it is included in total cost so economic profit is zero.
- Defines supernormal profit as profit above normal profit, occurring when average revenue exceeds average total cost at the profit-maximising output.
- Defines a loss as total revenue below total cost, equivalently average revenue below average total cost.
- Applies the relationships TR = TC (normal profit), TR > TC (supernormal profit) and TR < TC (loss) to a numerical or diagrammatic example.
- Distinguishes economic profit from accounting profit by noting that normal profit is an opportunity cost of the entrepreneur's resources.
Examiner Tips
- 💡Learn the three revenue-cost conditions (TR = TC, TR > TC, TR < TC) and match each to normal profit, supernormal profit and loss.
- 💡Practise reading the gap between average revenue and average total cost on a diagram to identify the profit or loss per unit.
- 💡Use a short numerical example in explanations to show the calculation of profit or loss rather than only stating definitions.
Common Mistakes
- Treating normal profit as zero profit: the error is ignoring that normal profit is a cost, so the correction is that normal profit means zero economic profit but a positive accounting return.
- Confusing supernormal profit with any positive accounting profit: the correction is that supernormal profit exists only when revenue exceeds total cost including normal profit.
- Assuming a loss means the firm must close immediately: the correction is that a loss-making firm may continue in the short run if it covers its variable costs, which links to shut-down analysis.