Remembering Economic and Normal Profit.
Remembering Economic and Normal Profit.
It may be quite simple to some people but during my revision for my latest exams my mind went blank and for some information overload reason I struggled to distinguish between the two.
The easiest way to remember the difference between Economic and Normal Profit.
Normal profit takes into consideration opportunity cost.
Opportunity cost being the cost to the individual that he/she could have earned elsewhere doing something different. This could be where a garage owner decides to use it as a garage himself or rent it out for money.
In any case, a business should always aim to make ‘Normal Profit’. It doesn’t make this:
Normal Profit = Total Cost
Then the owner should leave the industry and operate elsewhere in another market.
Now if the business’s Profit is more than total cost then the business is said to be making supernormal profits.
Another name given to supernormal profits is economic profit.
Total Revenue – Full Economic Cost = Economic Profit.
So any extra money earned is an economic profit. If the businesses revenue = cost then it’s normal profit.
Full Economic Cost included opportunity cost as mentioned above.
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