Normal Profits - However, if the actual profit of a firm is...

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Normal Profits: The concept of normal profit is of analytical or theoretical nature. Ordinarily it can be stated that a normal profit condition is one in which economic profits are zero. Such a situation will arise when total revenue of a firm is equal to its total cost. Marshall has stated that normal profit is that rate of minimum profit which a firm must earn in order to survive in the market . Depending upon actual market conditions a firm may earn Super Normal (more than normal), Normal (Just normal), or Sub Normal (less than normal) profits. By way of an example, consider a firm which expects a minimum profit of 8 percent over the costs of production. If the actual profit it earns is 10 percent then the firm makes Super normal profit. If the firm earns exactly 8 percent then it is said to be making normal profit.
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Unformatted text preview: However, if the actual profit of a firm is only 6 percent then it is suffering sub normal profit (loss). In a competitive market, super normal profits are competed with and eliminated. Firms suffering subnormal profits may have to close down in the long run. The competitive rule permits only normal profits to all the firms in the long run. Profit = TR - TC When TR = 100 and TC = 80 Profit = 100 - 80 = 20 Super Normal When TR = 100 and TC = 100 Profit = 100 -100 = 0 Normal When TR = 100 and TC = 120 Profit = 100 -120 = -20 Sub Normal Normal profit rate is governed by the general expectations of a firm. It is usually equal to current market rate of interest. In that sense it is an opportunity cost of capital resources....
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This note was uploaded on 11/26/2011 for the course ECON MICRO ec 201 taught by Professor - during the Fall '10 term at Montgomery.

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Normal Profits - However, if the actual profit of a firm is...

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