economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analy ...

, abnormal profit, also called excess profit, supernormal profit or pure profit, is "profit of a firm over and above what provides its owners with a normal (market equilibrium) return to capital."

Normal profit In economics, profit is the difference between the revenue that an economic entity has received from its outputs and the total cost of its inputs. It is equal to total revenue minus total cost, including both explicit and implicit costs. It ...

(return) in turn is defined as

opportunity cost In microeconomic theory, the opportunity cost of a particular activity is the value or benefit given up by engaging in that activity, relative to engaging in an alternative activity. More effective it means if you chose one activity (for exampl ...

of the owner's resources. A related broader term is

economic rent In economics, economic rent is any payment (in the context of a market transaction) to the owner of a factor of production in excess of the cost needed to bring that factor into production. In classical economics, economic rent is any payment ...

, which applies to the owner of a resource, such as

land Land, also known as dry land, ground, or earth, is the solid terrestrial surface of the planet Earth that is not submerged by the ocean or other bodies of water. It makes up 29% of Earth's surface and includes the continents and various isl ...

, rather than to the firm as such. According to the theoretical model of perfect competition, abnormal profits are unsustainable because they stimulate new supply, which forces down prices and eliminates the abnormal profit. Abnormal profit persists in the long run in imperfectly competitive markets where firms successfully block the entry of new firms. Abnormal profit is usually generated by an

oligopoly An oligopoly (from Greek ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a market structure in which a market or industry is dominated by a small number of large sellers or producers. Oligopolies often result fr ...

or a

monopoly A monopoly (from Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situation where a speci ...

; however, firms often try to hide this fact, both from the market and government, in order to reduce the chance of competition, or

government intervention Economic interventionism, sometimes also called state interventionism, is an economic policy position favouring government intervention in the market process with the intention of correcting market failures and promoting the general welfare o ...

in the form of an

antitrust Competition law is the field of law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as antitrust l ...

investigation. In principle, there are three kinds of abnormal profit: *

Monopoly profit Monopoly profit is an inflated level of profit due to the monopolistic practices of an enterprise.Bradley R. Chiller, "Essentials of Economics", New York: McGraw-Hill, Inc., 1991. Basic classical and neoclassical theory Traditional economics sta ...

Resource rent In economics, rent is a surplus value after all costs and normal returns have been accounted for, i.e. the difference between the price at which an output from a resource can be sold and its respective extraction and production costs, including norm ...

Intramarginal rent This glossary of botanical terms is a list of definitions of terms and concepts relevant to botany and plants in general. Terms of plant morphology are included here as well as at the more specific Glossary of plant morphology and Glossary o ...

. Business writer

Michael Porter Michael Eugene Porter (born May 23, 1947) is an American academic known for his theories on economics, business strategy, and social causes. He is the Bishop William Lawrence University Professor at Harvard Business School, and he was one of t ...

and Anita M. McGahan undertook an empirical study of the "emergence and sustainability of abnormal profits" in 2003, in which they concluded that both industry structure and firm performance were determinants of whether abnormal profits could be sustained by firms.Porter, M. and McGahan, A.
The emergence and sustainability of abnormal profits
''Strategic Organization'', Vol. 1, No. 1 (February 2003), pp. 79-108

References

Profit Monopoly (economics) {{Microeconomics-stub

See also

References