Constituents of Net Profit

Normal Profit

According to Stonier and Hague, “Normal profits are those which are just sufficient to induce the entrepreneur to stay in business” If an entrepreneur does not get normal profit, he quits the industry and seek profits elsewhere. Normal profit is the reward for the specific function performed by the entrepreneur in the field of production. He organizes the factors of production and undertakes risks which cannot be anticipated and insured. For this distinct function, the entrepreneur is rewarded with normal profit. Like any other factor reward, normal profit is included in the cost of production.

Super Normal Profit

Super normal profit is the profit over and above the normal profit. It is a surplus income and is not included in the cost of production. When the price of the product is higher than the average cost of production, the firms get super normal profit. It arises mainly due to innovations and chance gains. Innovations refer to the process of introducing something new into the product or process or both. It may take the form of a new good, a new method of production, conquest of a new source of raw materials etc. It may reduce the cost of production or increase the demand for his may arise due to windfall reasons. Coming like a bolt from the blue like fluctuations in the general level of price, income & employment, war time inflation, change in demand etc. These factors are beyond the control of the firm.

Monopoly Profit

Monopoly profit arises due to the presence of monopoly elements in the market. That means if a firm is protected from competition of other firms, it enjoys a position of monopoly and therefore will get a profit above the normal profit, Under pure monopoly, there is a single producer of a unique good having no close substitute in the market. Strong barriers to entry exist for the outside firms. Hence under monopoly, the firm can retain abnormal profit in the long-run. But in other forms of imperfect competition, firms enjoy varying degrees of monopoly power through patent rights, trademark, brand name etc. This gives rise to monopoly profit.