Super-normal Profit

Super-normal Profit:

Whenever the average revenue of the firm is more than its average cost, the firm is earning super-normal gain.

269_super normal profit.jpg

In figure above, output is evaluated all along the x-axis and price, revenue and cost all along the y-axis. OP is the prevailing cost in the market. PL is the demand curve or average and also the marginal revenue curve. SMC and SAC are the short run average and marginal cost curves. The firm is in equilibrium at point ‘E’; where MR = MC and MC curve cuts MR curve from underneath at the point of equilibrium. Hence the firm will be generating OM level of output. At OM level of output ME is AR and MF is the average cost. Profit per unit of output is EF (i.e., the difference among ME and MF). The net profits earned by the firm will be equivalent to EF (i.e., profit per unit) multiplied by OM or HF (i.e., net output). Therefore the net profits will be equivalent to the region HFEP. The HFEP is a supernormal profits received by the firm.

 

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