What is supernormal profit?

When a firm is making a supernormal profit, this refers to a profit level at which new firms are willing to enter the market. This suggests that the firms currently in the market are making a profit level above what can be expected from this market and the activities relating to production. Therefore, in a perfect market new firms will enter the market to exploit this, pushing down the level of profit made to until a normal level is reached. It is an illusion to suggest that in a market where no firms are joining that only a normal profit is being earned, as there may be barriers to entry that are protecting this supernormal profit level.

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Answered by Chris B. Economics tutor

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