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:
“It is normal to give away a little of one’s life in order not to lose it all.”
—Albert Camus (1913–1960)
“Already nature is serving all those uses which science slowly derives on a much higher and grander scale to him that will be served by her. When the sunshine falls on the path of the poet, he enjoys all those pure benefits and pleasures which the arts slowly and partially realize from age to age. The winds which fan his cheek waft him the sum of that profit and happiness which their lagging inventions supply.”
—Henry David Thoreau (1817–1862)