Profit: normal profit, sub-normal profit and supernormal profit

Types of Cost, Revenue and Profit in Economics

1. Costs

Think of a lemonade stand. The money you spend on lemons, sugar and cups each day is a variable cost – it changes with how many cups you sell. The rent you pay for the stand every month is a fixed cost – it stays the same no matter how many cups you sell.

  • Fixed Cost (FC) – stays constant in the short run.

  • Variable Cost (VC) – changes with output.

  • Total Cost (TC) = FC + VC. \$TC = FC + VC\$

  • Average Cost (AC) = TC ÷ Q. \$AC = \frac{TC}{Q}\$

  • Marginal Cost (MC) = change in TC ÷ change in Q. \$MC = \frac{\Delta TC}{\Delta Q}\$

2. Revenue

Revenue is the money you get from selling. If you sell each cup of lemonade for \$1 and sell 50 cups, your total revenue (TR) is \$50.

  • Total Revenue (TR) = Price × Quantity. \$TR = P \times Q\$

  • Average Revenue (AR) = TR ÷ Q. \$AR = \frac{TR}{Q}\$

  • Marginal Revenue (MR) = change in TR ÷ change in Q. \$MR = \frac{\Delta TR}{\Delta Q}\$

3. Profit

Profit is what’s left after you pay all costs. It tells you how well the business is doing.

Formula: \$π = TR - TC\$

Types of profit:

Profit TypeDefinitionExample
Normal ProfitZero economic profit – all costs, including opportunity cost, are covered.Lemonade stand earns exactly enough to cover rent, ingredients, and the owner’s time.
Supernormal ProfitPositive economic profit – more than the opportunity cost.Lemonade stand earns extra money that could have been earned elsewhere.
Sub‑normal ProfitNegative economic profit – costs exceed revenue.Lemonade stand loses money because rent and ingredients cost more than sales.

4. Short‑Run vs Long‑Run Production

In the short run, at least one input (like rent or machinery) is fixed. In the long run, all inputs can be varied.

  • Short‑run: You can change how many cups you make, but you can’t change the rent.

  • Long‑run: You could move to a cheaper location or buy a new juicer.

Analogy: Think of a school cafeteria. In the short run, the cafeteria can change the number of students served each day, but the building and kitchen equipment stay the same. In the long run, the school can build a new cafeteria or upgrade the kitchen.

Exam Tip: When you’re given a profit figure, decide if it’s normal, supernormal or sub‑normal by comparing it to zero economic profit. Remember: \$π = 0\$ → normal profit.

Quick Check: If \$TR > TC\$ and the profit is positive, you have a supernormal profit. If \$TR = TC\$, it’s normal profit. If \$TR < TC\$, it’s sub‑normal profit.