Supernormal Profit: Profit Above the Normal Level, Attracting New Competitors

Supernormal profit, also known as abnormal profit or economic profit, occurs when a firm's profit exceeds the normal expected return. This attracts new competitors to the market.

Introduction

Supernormal profit, also known as abnormal profit or economic profit, is a key concept in economics and finance. It occurs when a firm’s profit exceeds the normal expected return, thereby attracting new competitors into the market. Understanding supernormal profit is essential for grasping market dynamics, business strategy, and competitive behavior.

Historical Context

The concept of supernormal profit has its roots in classical economics. It was elaborated by economists like Adam Smith, who identified the forces of competition that drive markets towards equilibrium. Over time, this notion has been developed and refined in various economic theories, including perfect competition and monopoly frameworks.

Types/Categories

Supernormal profit can be categorized based on market structure:

• Perfect Competition: Rare due to high competition; firms typically make normal profit.
• Monopoly: Common, as monopolists can set higher prices due to lack of competition.
• Oligopoly: Firms may earn supernormal profits due to collusion or strategic alliances.
• Monopolistic Competition: Firms with differentiated products can achieve supernormal profit in the short run.

Key Events

• Industrial Revolution: Many firms achieved supernormal profits due to new technologies and markets.
• Tech Boom (1990s-2000s): Companies like Microsoft and Google experienced supernormal profits through innovation and market control.

Detailed Explanations

Supernormal profit is calculated as:

$$ \text{Supernormal Profit} = \text{Total Revenue} - \text{Total Cost} - \text{Normal Profit} $$

In graphical terms, using Hugo-compatible Mermaid diagram:

    graph TD;
	    A(Total Revenue) -->|Subtract| B(Total Cost)
	    B -->|Subtract| C(Normal Profit)
	    C --> D(Supernormal Profit)

Importance

Supernormal profits are significant as they:

• Indicate a firm’s strong market position.
• Attract new entrants, leading to increased competition.
• Reflect market inefficiencies or innovation.

Applicability

• Business Strategy: Firms aim for supernormal profits to maximize shareholder value.
• Policy Making: Regulators monitor supernormal profits to prevent monopolistic practices.

Examples

• Google: Achieves supernormal profits through dominance in online advertising.
• Pharmaceutical Firms: Often earn supernormal profits from patented drugs.

Considerations

• Market Entry Barriers: High barriers can sustain supernormal profits.
• Regulatory Environment: Strict regulations can limit the ability to earn supernormal profits.

Related Terms

• Normal Profit: The minimum profit necessary for a firm to stay in business.
• Economic Rent: Earnings in excess of the opportunity cost.

Comparisons

• Normal Profit vs. Supernormal Profit: Normal profit allows for business sustainability, while supernormal profit attracts competition.
• Economic Profit vs. Accounting Profit: Economic profit considers opportunity costs, whereas accounting profit does not.

Interesting Facts

• Tech Monopolies: Many tech giants sustain supernormal profits by continuous innovation and market control.

Inspirational Stories

• Apple Inc.: Transformed from near bankruptcy to supernormal profits through innovation and strategic management.

Famous Quotes

• “Profit is the applause you get for taking care of your customers and creating a motivating environment for your people.” - Ken Blanchard

Proverbs and Clichés

• “Profit is the engine that drives the business train.”
• “High profits attract high competition.”

Expressions, Jargon, and Slang

• Cash Cow: A business or product generating a steady, high-profit margin.
• Money Machine: A highly profitable business.

FAQs

Q: How is supernormal profit different from normal profit? A: Normal profit is the minimum return necessary to keep a firm in business, whereas supernormal profit exceeds this baseline.

Q: Can firms in perfect competition earn supernormal profits? A: In the short run, yes, but in the long run, high competition drives profits to normal levels.

References

1. Samuelson, P. A., & Nordhaus, W. D. (2009). Economics.
2. Stigler, G. J. (1957). Perfect Competition, Historically Contemplated.

Summary

Supernormal profit plays a crucial role in economic theory and business practice. It reflects market conditions, influences competition, and can indicate the success or inefficiencies of firms. Understanding this concept helps in devising effective business strategies and economic policies.