- Normal profit
- Normal profit is the minimum profit an owner must expect to earn to keep their resources in the business, and economists count it as a cost.
- Supernormal profit
- Supernormal profit is any profit above normal profit, where total revenue exceeds total cost including both explicit and implicit costs.
The costs and profits an economist counts
Can you name the two kinds of cost and the two kinds of profit an economist counts?
Normal profit only makes sense once the owner's own resources are counted as a cost.
Explicit costs are out-of-pocket costs, the actual payments a firm makes, such as the wages it pays its staff or the rent on its premises.
Can you think of an example?
Sam's café pays £30,000 a year in rent and £90,000 for staff and stock. Both sums leave its bank account.
Implicit costs are the opportunity cost of using resources the firm already owns, often ones its owner contributes.
Can you think of an example?
Sam left a £40,000 job to run the café and draws no formal salary. The £40,000 she gives up is a cost, though no money changes hands.
Accounting profit is total revenue minus explicit costs only, the difference between the money brought in and the money paid out.
Can you think of an example?
The café takes £150,000 a year, so its accounting profit is £150,000 − £120,000 = £30,000. Its tax bill is based on this figure.
Economic profit is total revenue minus total cost, including both explicit and implicit costs.
Can you think of an example?
Take off the £40,000 salary Sam gave up as well, and her economic profit is £30,000 − £40,000 = −£10,000, less than normal profit.