Normal Profit
Normal profit is a component of (implicit) costs, and so not a component of business profit at all. It represents the opportunity cost for enterprise, since the time that the owner spends running the firm could be spent on running another firm. The enterprise component of normal profit is thus the profit that a business owner considers necessary to make running the business worth his while i.e. it is comparable to the next best amount the entrepreneur could earn doing another job. Particularly if enterprise is not included as a factor of production, it can also be viewed a return to capital for investors including the entrepreneur, equivalent to the return the capital owner could have expected (in a safe investment), plus compensation for risk. In other words, the cost of normal profit varies both within and across industries; it is commensurate with the riskiness associated with each type of investment, as per the risk-return spectrum.
Only normal profits arise in circumstances of perfect competition when long run economic equilibrium is reached; there is no incentive for firms to either enter or leave the industry.
Read more about this topic: Profit (economics)
Famous quotes containing the words normal and/or profit:
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—Eric Taylor, Leroux, and Arthur Lubin. M. Villeneuve (Frank Puglia)
“When we can drain the Ocean into mill-ponds, and bottle up the Force of Gravity, to be sold by retail, in gas jars; then may we hope to comprehend the infinitudes of man’s soul under formulas of Profit and Loss; and rule over this too, as over a patent engine, by checks, and valves, and balances.”
—Thomas Carlyle (1795–1881)