Abnormal profits occur when total revenue exceeds all costs, including opportunity costs.

What are abnormal profits, and why do they matter?

Profits show up in different ways. Sometimes a business earns just enough to cover all costs and keep going. Other times, profits look noticeably brighter—so bright that they exceed every cost tied to making a good or service. In economics, that extra brightness is called abnormal profits. It’s also known as economic profits, or “supernormal” profits in some textbooks. Let me explain what that means in plain terms and why it shows up (and then, often, fades away).

Normal profits vs abnormal profits: set-up in plain language

Think of a business as a team trying to win the game with two kinds of costs. First, there are explicit costs: rent, wages, materials, utilities—payments you can see on a balance sheet. Then there are implicit costs: the opportunities you give up when you choose one path over another. If you take the job of running a cafe, the implicit cost might be the salary you’d earn if you worked as an employee somewhere else, or the income you’d get from investing in a different venture. When a firm’s total revenue covers both types of costs, we call that normal profit. It’s the minimum “payoff” needed to keep the business in its current line of work in the long run.

Now, what about abnormal profits? That’s when total revenue not only covers explicit costs and explicit financing, but also exceeds the total costs including those implicit costs—the opportunity costs of using resources in this particular way. In other words, the business is earning more than it would if those same resources were put to their next best alternative. That little extra is the abnormal profit.

A quick way to picture it: draw revenue on the top line and all costs under it. If the top line sits above all costs, the graph shows not just a tidy profit, but an extra cushion—an abnormal profit. If you’re scratching your head about the word “abnormal,” you’re not alone. The term is a nod to the idea that such profits are not expected to persist in a perfectly competitive world, where competition tends to push profits toward a normal, market-clearing level.

Where abnormal profits come from (and why they don’t last forever)

Abnormal profits don’t just happen by magic. They pop up when a firm earns more than the typical return on its resources. A few common sources:

• Monopolies or strong competitive advantages: If a firm has a patent, a unique technology, or brand strength that others can’t easily copy, it can charge prices that leave room for extra profit after all costs are paid.

• Barriers to entry: If new rivals find it hard to enter the market, the existing firm can maintain higher profits for longer.

• Superior efficiency or unique assets: A company might own productive resources that cut costs in ways others can’t quickly replicate.

But here’s the important part: in many markets, those abnormal profits tend to attract competition. New firms see the high profitability and enter the scene, which adds supply, pushes prices down, and squeezes those extra profits away. Over time, abnormal profits shrink toward the normal profit level. The long-run story in competitive markets is a dance: a burst of supernormal earnings followed by a return to the baseline.

A quick vocabulary check (how the terms fit together)

• Normal profits: the minimum level of profit necessary to keep a firm operating in the long run. It’s the payback you’d expect if resources were employed in their next best alternative.

• Abnormal profits: profits above the total costs, including opportunity costs. This is the “extra” that signals resources are earning more than their alternative uses.

• Marginal revenue: the extra revenue earned from selling one additional unit. This helps explain decisions about how much to produce but isn’t itself a measure of profitability.

• Average total cost: the total cost per unit of output. It’s a useful benchmark, but on its own it doesn’t tell you how much profit a firm actually makes.

If you’re thinking in diagrams, here’s a simple mental model: imagine a firm’s total revenue as a big curve, and total cost as another curve that runs underneath. The vertical distance between those two curves at the chosen output level is profit. If that distance is just enough to cover all costs, you’re at normal profit. If the distance is larger—there’s your abnormal profit.

Why this matters in the real world

Let’s bring this to life with a real-world vibe. Suppose a biotech company discovers a life-saving drug and patents it. For a while, the firm can charge a price that delivers high revenue, while the costs of research, development, and production are already built in. The extra gain—the abnormal profit—reflects the value of that patent and the hard-to-replicate know-how in the lab.

But patents don’t last forever. As soon as other firms find ways to produce similar treatments, or as regulatory approvals change, the advantage can shrink. In a bustling market with many players and low barriers to entry, the same drug might end up with thinner margins. The abnormal profits fade, and the industry moves toward normal profits again.

Short run, long run: what changes with time

In the short run, you’ll often see firms earning abnormal profits if they have some temporary edge: a unique location, a niche customer base, or a one-time efficiency gain. In the long run, though, the story tends to shift. If profits are unusually high, new entrants step in, supply increases, prices fall, and profits compress toward the normal level. If profits stay weak because costs outweigh revenue, firms may exit, supply contracts, and the market stabilizes at a new normal profit level.

How HL economics learners can think about this clearly

• Start with the baseline: normal profits are the minimum reward to keep resources in their current use.

• See abnormal profits as the short-lived bonus that arises when revenue exceeds all costs, including what resources could earn elsewhere.

• Remember the flow: higher profits attract competitors; competition narrows profits until the abnormal bit fades.

• Distinguish the terms: marginal revenue tells you about selling one more unit; average total cost tells you the per-unit cost, but neither alone defines profitability.

A practical, no-nonsense guide to calculate (in your head or on paper)

• Step 1: Add up all costs—explicit plus implicit. The implicit part is the value of time and resources you’re forgoing by staying with this firm or enterprise.

• Step 2: Determine total revenue by multiplying price by quantity sold.

• Step 3: Subtract total costs from total revenue. If the result is positive and large, you’ve got abnormal profits. If the result is positive but only enough to cover all costs, you’re looking at normal profits. If it’s negative, you’re in the red.

• Step 4: Compare with the long-run horizon. If the market is highly competitive, expect the abnormal portion to shrink over time as rivals enter.

A few friendly digressions that still connect back

• The idea of abnormal profits is a bit like spotting a rare indie coffee shop in a big city. For a moment, that shop can price a little higher and still fill cups, because it offers something distinct. As more shops copy the vibe and menu, the extra value evaporates and prices settle.

• Think about technology giants who ride waves of innovation. Early advantages can generate abnormal profits for a while, but the landscape changes quickly as technology diffuses and competitors catch up. That’s why the genius move is often to reinvest profits to create the next edge, not to rest on the first big win.

• In a global sense, abnormal profits can be money magnets for places with natural resources or strategic control over scarce inputs. But again, resource competition and policy shifts can level the field faster than you expect.

Why this concept isn’t just trivia

Understanding abnormal profits helps you see how markets allocate resources over time. It explains why some firms grow big, why certain industries look bubbly for a stretch, and why competition is the perpetual force shaping profits. It also clarifies why governments worry about monopoly power and why policy tools—like antitrust laws or patent regimes—exist. The whole point is to keep the economy moving toward a balance where resources are used where they create the most value, not where they earn the most temporary profit.

A tiny recap to keep you centered

• Abnormal profits = total revenue minus total costs (including opportunity costs) that exceed normal profits.

• Normal profits = the baseline reward needed to keep resources in their current use.

• Abnormal profits often attract new competitors, pushing profits down toward normal in the long run.

• Marginal revenue and average total cost are helpful neighbors in the big picture, but they aren’t the final word on profit by themselves.

• In the real world, patents, brands, and barriers to entry can create temporary pockets of abnormal profits, which tend to fade as competition learns and adapts.

If you’re ever uncertain, bring it back to the core idea: are all costs covered, including the value of the resources used elsewhere? If yes, you’ve found normal profits. If there’s extra beyond that, you’ve found abnormal profits—the kind that tells a story about how markets experiment with resources, price, and power, right here, right now. And that, in a nutshell, is what makes economics feel alive instead of just numbers on a page.