Normal and Supernormal Profits and Business Operations in Global Economy

Normal and Supernormal Profits and Business Operations in Global Economy

Introduction

The paper focuses on the concept of normal profits and supernormal profits in a holistic context. It highlights the various means by which these concepts are employed in business planning as well as performance. The paper attempts to provide brief understanding of the two concepts and then provides detailed graphical representations to assist in the explanation as to how these two concepts are extremely vital and relevant in business planning and performance.

Discussion

Profit is basically the reward or return for the activities and operations undertaken as a part of the entrepreneurial functions. The concept of profits is treated very differently in the subject of economics compared to that of accounts. In accounts, profit is simply the difference of total revenues and total costs and the firm is considered to have gained nothing if the revenues equal cost (Cowie, 2009, pp 134 - 141). However, in economics, the incorporation of the concept of opportunity costs slightly changes the concept of profits. This is the reason as to why the concept of “Normal Profit” and “Supernormal Profit” exists in the economic theory (Geetika, Ghosh & Choudhury, 2008, pp 345 - 349). The concept of “Normal Profit” and “Supernormal Profit” is defined as under:

Normal Profit

Normal profit is considered to be the minimum earning that entrepreneurs must earn in order to stay in business. This is because if an entrepreneur fails to generate this basic profit from its operations, the business will have to be shutdown. Furthermore, normal profit is actually the summation of the implicit and explicit costs and not an actual component of the economic profit. If a business is earning a normal profit, it is capable of keeping the business running by ensuring that it meets its cost including paying the salaries. Normal profit is a condition when the average revenue equals the average total cost (AV = ATC) (Cowie, 2009, pp 134 - 141).

Supernormal Profit

Supernormal profit, also termed as abnormal profit and economic profit, is the excess of profit earned above the level of normal profit. Supernormal profits occur when the revenues are in excess of the total costs. Thus, when an entrepreneur is operating business at revenues being equal to the total costs, it is earning normal profit. On the other hand, if the revenues exceed the total costs, the entrepreneur is earning supernormal profits. Supernormal profits arise due to lack of competition for business. However, a business is soon pushed back to the level of “normal profit” in competitive markets. Supernormal profits is a condition where the average revenue is more than the average total cost (AV > ATC) (Joseph, 2008pp 209 - 217).

Normal/Supernormal Profits and Business Planning

In the economic scenario, the concept of normal profit and supernormal profit is utilized by all business that is determined in making the most out of the market demand. Business planning is essential in terms of determining as to what price has to be ...