Ever wondered why some businesses stay open despite barely breaking... Show more
SociologySign up to see the contentIt's free!
Access to all documents
Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
48
•
9 Dec 2025
•
Understanding Profits in Economics
Tanvir Ahmed
@txnvir_ahmed
1 / 3
What Is Profit Really?
You might think profit is just money left over after paying bills, but economists see it differently. Economic profit equals total revenue minus total costs - and crucially, those total costs include opportunity costs (what you could have earned doing something else with your resources).
This distinction matters because it explains why some profitable-looking businesses actually close down. When we account for what owners could earn elsewhere, that "profit" might actually represent a loss.
Normal profit occurs when total revenue exactly equals total economic costs, giving an economic profit of zero. Think of it as the minimum return needed to keep a business owner from switching to their next best alternative - like working for someone else or investing their money differently.
Key Point: Normal profit isn't actually "zero profit" - it's the baseline return that keeps resources in their current use long-term.
When Firms Stay Open or Shut Down
Here's where it gets practical: if a firm can't make normal profit, it'll eventually close because the owner could do better elsewhere. Even if they're making money on paper, those resources (time, capital, skills) could generate higher returns in alternative uses.
However, loss-making firms don't always shut immediately. The decision depends on whether total revenue covers variable costs. If it does, they'll keep operating short-term to help pay fixed costs like rent and loans.
But when total revenue falls below variable costs, it's game over - they should shut down immediately. At this point, they're losing money on every single unit produced, making closure the rational choice.
The short-run shutdown condition is clear: continue operating if revenue exceeds variable costs, but close immediately if it doesn't.
Key Point: Firms can survive temporary losses, but only if they're still covering their day-to-day running costs.
Supernormal Profits and Market Signals
Supernormal profit happens when total revenue exceeds total costs - meaning the business earns more than its best alternative use of resources. This is the sweet spot every entrepreneur dreams of reaching.
These excessive profits send powerful signals throughout the economy. They attract new competitors like magnets, as other firms spot the opportunity to earn above-normal returns in this market.
Profit-maximising firms achieve this by setting output where marginal cost equals marginal revenue . This golden rule helps businesses find the exact production level that maximises their profits.
Understanding these profit concepts helps explain market dynamics - why some industries see new entrants flooding in whilst others see mass exits. It's all about those profit signals guiding resources to their most valuable uses.
Key Point: Supernormal profits act as market signals, encouraging new firms to enter and existing firms to expand their operations.
We thought you’d never ask...
What is the Knowunity AI companion?
Our AI Companion is a student-focused AI tool that offers more than just answers. Built on millions of Knowunity resources, it provides relevant information, personalised study plans, quizzes, and content directly in the chat, adapting to your individual learning journey.
Where can I download the Knowunity app?
You can download the app from Google Play Store and Apple App Store.
Is Knowunity really free of charge?
That's right! Enjoy free access to study content, connect with fellow students, and get instant help – all at your fingertips.
Most popular content in Economics
Most popular content
Can't find what you're looking for? Explore other subjects.
Students love us — and so will you.
4.9/5
App Store
4.8/5
Google Play
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user
Understanding Profits in Economics
Tanvir Ahmed
@txnvir_ahmed
Ever wondered why some businesses stay open despite barely breaking even whilst others seem to rake in massive profits? Understanding the difference between normal and supernormal profit is crucial for grasping how firms make decisions about whether to keep operating,... Show more
What Is Profit Really?
You might think profit is just money left over after paying bills, but economists see it differently. Economic profit equals total revenue minus total costs - and crucially, those total costs include opportunity costs (what you could have earned doing something else with your resources).
This distinction matters because it explains why some profitable-looking businesses actually close down. When we account for what owners could earn elsewhere, that "profit" might actually represent a loss.
Normal profit occurs when total revenue exactly equals total economic costs, giving an economic profit of zero. Think of it as the minimum return needed to keep a business owner from switching to their next best alternative - like working for someone else or investing their money differently.
Key Point: Normal profit isn't actually "zero profit" - it's the baseline return that keeps resources in their current use long-term.
Sign up to see the contentIt's free!
Access to all documents
Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
When Firms Stay Open or Shut Down
Here's where it gets practical: if a firm can't make normal profit, it'll eventually close because the owner could do better elsewhere. Even if they're making money on paper, those resources (time, capital, skills) could generate higher returns in alternative uses.
However, loss-making firms don't always shut immediately. The decision depends on whether total revenue covers variable costs. If it does, they'll keep operating short-term to help pay fixed costs like rent and loans.
But when total revenue falls below variable costs, it's game over - they should shut down immediately. At this point, they're losing money on every single unit produced, making closure the rational choice.
The short-run shutdown condition is clear: continue operating if revenue exceeds variable costs, but close immediately if it doesn't.
Key Point: Firms can survive temporary losses, but only if they're still covering their day-to-day running costs.
Sign up to see the contentIt's free!
Access to all documents
Improve your grades
Join milions of students
By signing up you accept Terms of Service and Privacy Policy
Supernormal Profits and Market Signals
Supernormal profit happens when total revenue exceeds total costs - meaning the business earns more than its best alternative use of resources. This is the sweet spot every entrepreneur dreams of reaching.
These excessive profits send powerful signals throughout the economy. They attract new competitors like magnets, as other firms spot the opportunity to earn above-normal returns in this market.
Profit-maximising firms achieve this by setting output where marginal cost equals marginal revenue . This golden rule helps businesses find the exact production level that maximises their profits.
Understanding these profit concepts helps explain market dynamics - why some industries see new entrants flooding in whilst others see mass exits. It's all about those profit signals guiding resources to their most valuable uses.
Key Point: Supernormal profits act as market signals, encouraging new firms to enter and existing firms to expand their operations.
We thought you’d never ask...
What is the Knowunity AI companion?
Our AI Companion is a student-focused AI tool that offers more than just answers. Built on millions of Knowunity resources, it provides relevant information, personalised study plans, quizzes, and content directly in the chat, adapting to your individual learning journey.
Where can I download the Knowunity app?
You can download the app from Google Play Store and Apple App Store.
Is Knowunity really free of charge?
That's right! Enjoy free access to study content, connect with fellow students, and get instant help – all at your fingertips.
1
Smart Tools NEW
Transform this note into: ✓ 50+ Practice Questions ✓ Interactive Flashcards ✓ Full Mock Exam ✓ Essay Outlines
Mock Exam
Quiz
Flashcards
Essay
Similar content
Understanding Fixed & Variable Costs
Explore the key concepts of fixed and variable costs in microeconomics, focusing on their roles in short-run and long-run production. This summary covers how to calculate total costs, average fixed costs, and the implications of cost curves, providing essential insights for economics students.
Economics13
Economics Paper 1 Insights
Explore key concepts from the Edexcel Level 3 GCE Economics A Paper 1, focusing on market behavior, equilibrium price, price elasticity of demand, and competition. This comprehensive summary covers essential topics such as supply and demand dynamics, market structures, and government intervention, providing valuable insights for exam preparation.
Economics12
Economies & Diseconomies Explained
Explore the concepts of economies and diseconomies of scale in this detailed summary for CCEA A2 Business Studies. Understand how production scale affects costs, the benefits of growth, and the challenges faced by large firms. Key topics include internal and external economies of scale, managerial complexities, and the impact on communication and motivation. Ideal for exam preparation and enhancing your understanding of business growth dynamics.
Economics14
Production & Productivity Insights
Explore key concepts of production and productivity in microeconomics, including factors of production, productive efficiency, and the impact of labor productivity on economic growth. This summary provides a comprehensive overview for AQA AS Level students, highlighting essential definitions and relationships between output and efficiency.
Economics12
Understanding Economic Systems
Explore the key concepts of economic systems, including mixed, command, and market economies. This summary covers the roles of government intervention, supply and demand, and the importance of specialization and trade. Ideal for students preparing for exams or seeking to deepen their understanding of economics. Type: Summary.
Economics12
Understanding Economic Principles
Explore key concepts in microeconomics, including scarcity, opportunity cost, and the Production Possibilities Frontier (PPF). This summary covers economic specialization, market economies, and the efficiency of resource allocation, providing a comprehensive overview for students. Ideal for exam preparation or quick revision.
Economics12
Most popular content in Economics
Most popular content
Can't find what you're looking for? Explore other subjects.
Students love us — and so will you.
4.9/5
App Store
4.8/5
Google Play
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user
The app is very easy to use and well designed. I have found everything I was looking for so far and have been able to learn a lot from the presentations! I will definitely use the app for a class assignment! And of course it also helps a lot as an inspiration.
Stefan S
iOS user
This app is really great. There are so many study notes and help [...]. My problem subject is French, for example, and the app has so many options for help. Thanks to this app, I have improved my French. I would recommend it to anyone.
Samantha Klich
Android user
Wow, I am really amazed. I just tried the app because I've seen it advertised many times and was absolutely stunned. This app is THE HELP you want for school and above all, it offers so many things, such as workouts and fact sheets, which have been VERY helpful to me personally.
Anna
iOS user
Best app on earth! no words because it’s too good
Thomas R
iOS user
Just amazing. Let's me revise 10x better, this app is a quick 10/10. I highly recommend it to anyone. I can watch and search for notes. I can save them in the subject folder. I can revise it any time when I come back. If you haven't tried this app, you're really missing out.
Basil
Android user
This app has made me feel so much more confident in my exam prep, not only through boosting my own self confidence through the features that allow you to connect with others and feel less alone, but also through the way the app itself is centred around making you feel better. It is easy to navigate, fun to use, and helpful to anyone struggling in absolutely any way.
David K
iOS user
The app's just great! All I have to do is enter the topic in the search bar and I get the response real fast. I don't have to watch 10 YouTube videos to understand something, so I'm saving my time. Highly recommended!
Sudenaz Ocak
Android user
In school I was really bad at maths but thanks to the app, I am doing better now. I am so grateful that you made the app.
Greenlight Bonnie
Android user
very reliable app to help and grow your ideas of Maths, English and other related topics in your works. please use this app if your struggling in areas, this app is key for that. wish I'd of done a review before. and it's also free so don't worry about that.
Rohan U
Android user
I know a lot of apps use fake accounts to boost their reviews but this app deserves it all. Originally I was getting 4 in my English exams and this time I got a grade 7. I didn’t even know about this app three days until the exam and it has helped A LOT. Please actually trust me and use it as I’m sure you too will see developments.
Xander S
iOS user
THE QUIZES AND FLASHCARDS ARE SO USEFUL AND I LOVE THE SCHOOLGPT. IT ALSO IS LITREALLY LIKE CHATGPT BUT SMARTER!! HELPED ME WITH MY MASCARA PROBLEMS TOO!! AS WELL AS MY REAL SUBJECTS ! DUHHH 😍😁😲🤑💗✨🎀😮
Elisha
iOS user
This apps acc the goat. I find revision so boring but this app makes it so easy to organize it all and then you can ask the freeeee ai to test yourself so good and you can easily upload your own stuff. highly recommend as someone taking mocks now
Paul T
iOS user