Abnormal profit is profit above the minimum return needed to keep a firm’s resources in their current use. In economics, that means the firm is earning more than normal profit after accounting for both explicit costs and the opportunity cost of capital and entrepreneurship.
Economic Profit And Normal Profit
The relevant measure is economic profit:
\[ \text{Economic profit} = \text{Total revenue} - (\text{explicit costs} + \text{implicit costs}) \]
If economic profit is positive, the firm is earning abnormal profit. If economic profit is zero, the firm is earning normal profit, which is enough to keep the business and its capital in the industry.
Why Abnormal Profit Often Shrinks
In competitive markets, abnormal profit attracts entry. New firms expand supply, bid for inputs, and put downward pressure on price. Over time, that process tends to push economic profit back toward zero.
That is why persistent abnormal profit usually signals some barrier to entry or some durable advantage.
Why It Can Persist
Firms may keep abnormal profit when they have:
- market power,
- patents or proprietary technology,
- strong brands or network effects,
- cost advantages from scale or learning,
- regulation that limits entry.
In those cases, the firm may be able to keep price above average cost or keep rivals from eroding its position quickly.
Market Structure Context
Abnormal profit is usually temporary in perfect competition, less stable in monopolistic competition, and more sustainable in monopoly or oligopoly when barriers to entry are strong.
That makes abnormal profit a useful diagnostic concept when comparing market structures.