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Economic vs. Normal Profit: What's the Difference?

Edited by Sawaira Riaz || By Sumera Saeed || Updated on October 26, 2023
Economic profit accounts for both explicit and implicit costs, while normal profit is the minimum profit required to keep an owner-operated business running.

Key Differences

Economic profit is a comprehensive metric that captures the total profitability of a business after accounting for both explicit costs (like rent or salaries) and implicit costs (like the opportunity cost of capital). On the other hand, normal profit represents the level of profit that a business owner expects to earn, considering the risks associated with the business and ensuring the entrepreneur doesn't suffer a financial loss.
Sumera Saeed
Oct 26, 2023
When discussing economic profit, it's imperative to understand the role of opportunity costs, or the potential returns given up when one option is chosen over another. In contrast, normal profit doesn't delve into opportunity costs but is simply the baseline profit that makes operating the business worthwhile.
Sumera Saeed
Oct 26, 2023
Businesses aim to achieve economic profits, which indicates they are earning over and above the normal profit. This means that not only are they covering their explicit costs, but they're also exceeding the implicit costs. Conversely, if a business is only earning a normal profit, it suggests they're just breaking even after considering all their opportunity costs.
Sumera Saeed
Oct 26, 2023
It's important to note that achieving only a normal profit isn't indicative of a business failure. Earning a normal profit means the business is sustaining itself and ensuring the owner's time and resources are appropriately compensated. Yet, in terms of economic profit, if it's zero, it implies the firm is only earning a normal profit.
Sumera Saeed
Oct 26, 2023
In many economic models, firms in perfectly competitive markets will only earn a normal profit in the long run. When economic profits exist, they attract new entrants, increasing competition and driving profits back down. However, the idea of normal profit remains essential as it provides the benchmark against which economic profit is measured.
Aimie Carlson
Oct 26, 2023
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Comparison Chart

Definition

Profit after deducting both explicit and implicit costs.
Minimum profit required to sustain a business operation.
Sumera Saeed
Oct 26, 2023

Incorporates

Both explicit (actual) and implicit (opportunity) costs.
Only the expected return on investment.
Sumera Saeed
Oct 26, 2023

Indication

Business's success over and above the normal rate of return.
Business is breaking even after considering opportunity costs.
Sumera Saeed
Oct 26, 2023

Long-term Competitive Market

Tends to be zero in perfectly competitive markets.
Remains constant as it's the expected return.
Sumera Saeed
Oct 26, 2023

Desirability

Businesses aim to achieve economic profit.
Businesses aim to achieve at least a normal profit.
Sumera Saeed
Oct 26, 2023
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Economic and Normal Profit Definitions

Economic

Concerning the principles of a particular system of money.
They had a long debate on economic theories.
Aimie Carlson
Oct 26, 2023

Normal Profit

The expected return that compensates for the risk of a business.
Despite the challenges, the venture maintained its normal profit.
Sumera Saeed
Oct 26, 2023

Economic

Related to the production, distribution, and consumption of goods and services.
The economic growth of the country has been consistent.
Sawaira Riaz
Oct 26, 2023

Normal Profit

The minimum profit needed to keep a business operational.
She was content that her startup was earning a normal profit in its first year.
Sawaira Riaz
Oct 26, 2023

Economic

Referring to the wealth or financial state of a country or person.
His economic status improved after getting a new job.
Sumera Saeed
Oct 26, 2023

Normal Profit

The break-even level after accounting for opportunity costs.
After analyzing the finances, the company was just above the normal profit mark.
Sumera Saeed
Oct 26, 2023

Economic

Efficient in terms of time, money, or effort.
Solar panels provide an economic alternative to traditional energy sources.
Janet White
Oct 26, 2023

Normal Profit

The essential earning ensuring an entrepreneur's resources are compensated.
The goal for the first quarter was to at least reach a normal profit.
Harlon Moss
Oct 26, 2023

Economic

Involving considerations of financial gain.
The city made an economic decision to boost tourism.
Sumera Saeed
Oct 26, 2023

Normal Profit

A benchmark in competitive markets indicating zero economic profit.
In saturated markets, most businesses only achieve a normal profit.
Harlon Moss
Oct 26, 2023

Economic

Of or relating to the production, development, and management of material wealth, as of a country, household, or business enterprise.
Sumera Saeed
Sep 20, 2022

FAQs

Why is opportunity cost important in calculating economic profit?

Opportunity cost represents the value of the next best alternative foregone, crucial for understanding the true profitability of a choice.
Sumera Saeed
Oct 26, 2023

What is economic profit?

Economic profit is the difference between total revenue and total costs, including both explicit and opportunity costs.
Sumera Saeed
Oct 26, 2023

Why is normal profit important?

It represents the threshold for a business to remain viable in the long term.
Harlon Moss
Oct 26, 2023

Can a firm have high accounting profit but low or negative economic profit?

Yes, if the opportunity costs are high, this scenario is possible.
Sumera Saeed
Oct 26, 2023

How is economic profit different from accounting profit?

Accounting profit only considers explicit costs, while economic profit includes both explicit and opportunity costs.
Sawaira Riaz
Oct 26, 2023

Why might a firm continue operating at normal profit?

It may serve strategic purposes, maintain market presence, or await better market conditions.
Janet White
Oct 26, 2023

How does innovation impact economic profit?

Innovation can lead to increased demand, higher revenue, and thus higher economic profit.
Harlon Moss
Oct 26, 2023

Is it possible to have zero economic profit and still be successful?

Yes, as zero economic profit means earning just enough to cover all costs, including opportunity costs.
Sumera Saeed
Oct 26, 2023

How do changes in the market affect economic and normal profit?

Market changes can alter costs, revenue, and opportunity costs, affecting both types of profit.
Harlon Moss
Oct 26, 2023

How do companies maximize economic profit?

By increasing revenue, reducing costs, and wisely choosing opportunities with the highest returns.
Harlon Moss
Oct 26, 2023

Can economic theories on profit apply to all types of businesses?

While principles are broadly applicable, their impact can vary based on industry, scale, and market conditions.
Sara Rehman
Oct 26, 2023

Can economic profit be negative?

Yes, if total costs (including opportunity costs) exceed total revenue.
Harlon Moss
Oct 26, 2023

How does economic profit affect business decisions?

It helps businesses assess the true value of their choices and allocate resources efficiently.
Sumera Saeed
Oct 26, 2023

How is normal profit calculated?

It’s generally embedded in total costs as the fair return expected on invested capital.
Aimie Carlson
Oct 26, 2023

Can a business survive with only normal profit?

Yes, but it won’t have excess returns above the opportunity cost of capital.
Sumera Saeed
Oct 26, 2023

How does normal profit relate to perfect competition?

In perfect competition, firms typically earn normal profit in the long run due to free market entry and exit.
Sara Rehman
Oct 26, 2023

Is normal profit a sign of poor performance?

Not necessarily; it may indicate stability in competitive markets.
Sumera Saeed
Oct 26, 2023

Is normal profit included in economic profit?

Yes, it's part of the opportunity costs considered in economic profit calculation.
Sumera Saeed
Oct 26, 2023

What is normal profit?

Normal profit is the minimum profit necessary to keep a firm in operation; it’s considered an opportunity cost.
Sumera Saeed
Oct 26, 2023

Can a firm have positive economic profit indefinitely?

It's rare in competitive markets, as positive economic profit often attracts competitors, driving profits down.
Sumera Saeed
Oct 26, 2023
About Author
Written by
Sumera Saeed
Sumera is an experienced content writer and editor with a niche in comparative analysis. At Diffeence Wiki, she crafts clear and unbiased comparisons to guide readers in making informed decisions. With a dedication to thorough research and quality, Sumera's work stands out in the digital realm. Off the clock, she enjoys reading and exploring diverse cultures.
Edited by
Sawaira Riaz
Sawaira is a dedicated content editor at difference.wiki, where she meticulously refines articles to ensure clarity and accuracy. With a keen eye for detail, she upholds the site's commitment to delivering insightful and precise content.

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