NORMAL PROFIT – Entrepreneur may used his capital anywhere instead of business at no risk and can earn an income.

The entrepreneur will expect a minimum level of profit, reflecting what his or her capital and labour would have earned
elsewhere. This is the concept of normal profit.

Abnormal profit – Profit for economist is Total revenue (price X Unit sold) MINUS total cost (including normal profit). If
this is positive, then it is ABNORMAL PROFIT. The prospect of making abnormal profit motivates the entrepreneur to
take the business risks in supplying goods and services to the market.

In case of perfect competition firms – Firms will only make different amounts of profit from each other if they have
different cost structures. Their behaviour is strictly limited and the only way to boot profit would be to increase
productivity and lower average total cost.

Abnormal profit will only be a feature of perfect competition in the short run. This is because its existence will
act as an economic incentive for entry of new firms. The effect of this on the existing firms is that the market price will
fall and the abnormal profit will diminish. When abnormal profit goes, the entry of new firms dries up, and the existing
ones will simply be covering costs.

In case of Monopoly – A monopoly can’t always make abnormal profit – it depends how high its costs are. There may be
situations where the fixed costs are so high relative to the total cost that the market price can just cover the average
costs. In this case the monopolist would only make normal profit.

The monopolist’s profits could be increased in certain circumstances by a practice known as price discrimination. The
monopolist is making use of the fact that some consumers would have been prepared to pay more than the single price.
At this price they would be enjoying some consumer surplus. The monopolist’s aim is to charge what the consumers will
pay and turn the consumer surplus into producer surplus in the form of abnormal profit.