In
economics
Economics () is a behavioral science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services.
Economics focuses on the behaviour and interac ...
, 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
In economics, economic equilibrium is a situation in which the economic forces of supply and demand are balanced, meaning that economic variables will no longer change.
Market equilibrium in this case is a condition where a market price is esta ...
) return to capital."
Normal profit (return) in turn is defined as
opportunity cost
In microeconomic theory, the opportunity cost of a choice is the value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, ...
of the owner's resources. A related broader term is
economic rent
In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or bene ...
, 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 Earth not submerged by the ocean or another body of water. It makes up 29.2% of Earth's surface and includes all continents and islands. Earth's land sur ...
, rather than to the firm as such.
According to the theoretical model of
perfect competition
In economics, specifically general equilibrium theory, a perfect market, also known as an atomistic market, is defined by several idealizing conditions, collectively called perfect competition, or atomistic competition. In Economic model, theoret ...
, 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 () is a market in which pricing control lies in the hands of a few sellers.
As a result of their significant market power, firms in oligopolistic markets can influence prices through manipulating the supply function. Firms in ...
or a
monopoly
A monopoly (from Greek language, Greek and ) is a market in which one person or company is the only supplier of a particular good or service. A monopoly is characterized by a lack of economic Competition (economics), competition to produce ...
; 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
A market intervention is a policy or measure that modifies or interferes with a market, typically done in the form of state action, but also by philanthropic and political-action groups. Market interventions can be done for a number of reas ...
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 st ...
*
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 nor ...
*
Intramarginal rent
Business writer
Michael Porter
Michael Eugene Porter (born May 23, 1947) is an American businessman and professor at Harvard Business School. He was one of the founders of the consulting firm The Monitor Group (now part of Deloitte) and FSG, a social impact consultancy. ...
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
See also
*
Economic rent
In economics, economic rent is any payment to the owner of a factor of production in excess of the costs needed to bring that factor into production. In classical economics, economic rent is any payment made (including imputed value) or bene ...
*
War profiteering
A war profiteer is any person or organization that derives unreasonable profit (economics), profit from warfare or by selling weapons and other goods to parties at war. The term typically carries strong negative connotations. General profiteerin ...
*
Windfall gain
A windfall gain is an unusually high or abundant income, net profit or profit margin, that is sudden, unexpected, or, at times, anticipated.
Types
Examples of windfall gains include, but are not limited to:
*Unexpected inheritance or other large m ...
*
Excess profits tax
An excess profits tax, EPT, is a tax on returns or profits which exceed risk-adjusted ''normal'' returns. The concept of ''excess profit'' is very similar to that of economic rent. Excess profit taxes are usually imposed on monopolist industries ...
References
Profit
Monopoly (economics)
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