What is Supernormal Profit? – With Diagrams

What is supernormal profit?

Supernormal profit / abnormal profit/ economic profit definition

The amount of total revenue that exceeds the total cost can be defined as the supernormal profit (or abnormal/ economic profit) for a particular business organization.

In other words, economic profit is the total revenue minus explicit and implicit costs.

Supernormal or economic profit, in the views of some experts, is the difference between accounting profit and the opportunity cost the company has incurred by investing in its current initiative.

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Accounting Profit and Economic profit – Meanings & Differences

Are abnormal and supernormal profit the same thing?

Yes. Both abnormal and supernormal profit the same thing.

The supernormal profit is alternatively called as economic profit and abnormal profit  

Supernormal profit formula/ Economic profit formula

Economic profit = Total revenue – Total cost

Or we can determine economic profit using the following formula also,

Economic profit = Quantity of produced x (Average Revenue – Average Total Cost)

Economic profit vs normal profit

What happens when economic profit is zero?

When economic profit is zero, it is called as the “nominal profit”.

Normal profit

The normal profit is the zero economic profit. When a firm earns the normal profit, it earns the minimum amount of revenue that needs to prevail in the industry or market. In other words, when a firm produces normal profit, its total revenue will be equalized to total cost (TR = TC). At this point, the firm produces an efficient level of output.

Normal profit is there when,

Total revenue – Total cost = 0

So, Total revenue = Total cost

Supernormal profit diagram

Supernormal profit diagram in monopoly

Monopoly make an abnormal profit in short run as well as long run.

So, monopoly graph for short run and long run can be presented as follows. Following is a single price monopoly graph at its profit maximization output level.

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Monopoly Graph, Characteristics, Types, Examples and Causes

Assume that following is the supernormal profit diagram for a monopoly firm in United Kingdom.

In the above supernormal profit diagram, the average revenue (AR) curve equals to demand (D) curve. The marginal revenue (MR) curve has been graphed as it is lower than the average revenue curve. The marginal cost curve has been labeled MC curve which is initially decreasing and after its minimum point, increasing. The long-run average cost curve has been labeled as the LRACwhich shows the unit per cost of each output level.

According to the above graph, in point E, MR=MC. At the point E, this monopoly firm earn the maximum profit. The point where MR =MC can be considered as the profit maximization point or loss minimization point.  Profit maximization can occur at the over-capacity, efficient scale level, or under-capacity.

In this example, this monopolistic firm operates at the point Q1. (Where MR= MC). So, the price level equals P1 where the relevant price to Q1 production is. So, this monopolistic firm produces at the excess capacity in other words produces a lower amount of output than the optimum amount of output.

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Excess Capacity – Complete Lesson with FAQ

As presented in above graph, this firm earns an abnormal profit. Abnormal profit means, the amount of the profit that exceeds the normal profit.

Abnormal profit = Quantity of produced x (Average Revenue – Average Total Cost)

According to the above supernormal profit diagram at the point E, this monopoly firm earns a supernormal or abnormal profit. At this point,

Quantity of produced = Q1

Average Revenue = BQ1

Average Total Cost = CQ1

Abnormal profit = Q1 x (BQ1 – CQ1)

So, supernormal or abnormal profit equals BCAP1 rectangular.

Normal profit means a minimum level of profit is needed to keep the firm ongoing. It occurs when the average revenue equals to average income (AR = ATC). This monopolistic firm can earn normal profit at the Q2 output level.

Supernormal profit in oligopoly

Oligopolistic firms earn an abnormal profit in the both short run and long run. Because there are a few companies in the market and each company has a considerable monopoly power to control the market price and output. Short run abnormal profit diagram of an oligopolistic competitive firm also same to short run abnormal profit diagram of a monopolistic firm.

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Oligopoly: Definition, Characteristics and examples

Supernormal profit in monopolistic competition

A monopolistic competitive company can earn abnormal profit in the short run. Short run abnormal profit diagram of a monopolistic competitive firm also same to short run abnormal profit diagram of a monopolistic firm. But monopolistic competitive companies earn zero economic profit in the long run.

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Monopolistic competition graph , characteristics & examples

Supernormal profit in perfect competition

In the short run, firms in perfect competition can earn an abnormal profit, normal profit for economic loss. If firms earn economic profits, new firms see economic profits and come to the market (because there are no entry barriers). However, in long run perfect competitive firms earn only the normal profit.

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Perfect Competition Graph in Short Run and Long Run

Assume that following is the short run supernormal profit diagram for a perfect competitive firm in United Kingdom.

This individual perfect competitive firm has no power to influence the market price. It has to accept the P1 price. The demand curve of a perfectly competitive firm is perfectly elastic (P/ AR). So, the firm can sell the quantity that it wishes at the given price level (P1). In a perfect competitive firm, marginal revenue (MR) curve is also lay on demand curve of the firm. Marginal cost (MC) curve is labelled as MC and average cost curve is labelled as AC.

The point where MR =MC can be considered as the profit maximization point or loss minimization point. According to the following perfect competition graph, Q2 is the profit maximization point of the firm in short run (output level where MR=MC). At this output level, AR is higher than AC. So, the firm earns an economic profit. Amount of economic profit is presented in ABP1P2 area of this perfect competition graph.