What is normal profit?

Normal profit refers to the minimum amount of profit that a business must earn to remain viable in the long run, ensuring that resources are not withdrawn from the production process. It is the profit necessary to cover opportunity costs, which include not just explicit costs like wages and materials but also implicit costs such as the income that could have been earned if the owner had chosen to invest their resources elsewhere.

In this context, normal profit acts as a threshold. If a firm earns at least this amount, it indicates that the firm is covering all its costs and is in a state where it can continue to operate without needing to change its resource allocation. This concept is crucial in understanding how businesses make decisions about resource allocation and sustainability over time.

Normal profit differs from other forms of profit, such as economic profit, which occurs when total revenue exceeds total costs (including opportunity costs). Because normal profit is the baseline for long-term sustainability, businesses must strive to at least reach this level of profit to maintain their operations effectively.