Why abnormal profits in the short run happen and what they mean for firms

Outline (skeleton)

• Quick hinge: what “abnormal profits” mean in plain terms

• Short run vs long run: how profits can look different across time

• Why a firm might see higher than normal profits in the short run

• Price-setting power and market structure

• Product differentiation and brand appeal

• Demand surges or temporary efficiency advantages

• What this looks like in practice (easy-to-picture examples)

• Why it’s usually temporary: the pressure of new entrants

• Comparisons to other profit scenarios (zero economic profit, normal profit, losses)

• Practical takeaways for IB HL thinking and real markets

• Gentle wrap-up and quick self-check questions

Article: Abnormal Profits in the Short Run: What It Means in Real Markets

Let me start with the basics, because this topic pops up again and again in IB Economics HL discussions: what exactly are abnormal profits? In plain language, they’re economic profits—the kind you get when total revenue trounces total costs. But here’s the important twist: those costs aren’t just the obvious money you shell out (wages, rent, materials). They also include the opportunity costs—what you’re giving up by putting resources into this project instead of the next best alternative. When revenue covers both explicit costs and these hidden costs, you’ve hit zero economic profit. When revenue clears that bar and then some, you’ve earned abnormal or economic profits.

Short run, long run: the rhythm of profits

Think of a firm operating in a market where things can change quickly—think a fashionable new gadget, a sudden fad, or a local supplier with a rare skill. In the short run, a firm doesn’t have to adjust all its inputs. Some factors of production are fixed; others can be tweaked. In that window, prices might be sticky, demand can spike, and a clever operator might squeeze extra profit out of the existing setup. It’s perfectly plausible to see higher than normal profits in the short run.

But this isn’t a forever story. In the long run, new competitors can enter, more substitutes appear, and the dynamic pressure tends to push profits down toward the normal level (zero economic profit). The market’s invisible hand doesn’t wait around; it nudges profits toward a steadier, durable equilibrium.

Why might a firm in the short run punch above its weight?

Let’s unpack the main reasons you’ll encounter higher than normal profits, with a few everyday, intuitive examples to keep it grounded.

• Price-setting power or market structure. If a firm has some control over price—because it’s offering something scarce, or because the market structure is imperfect competition (think monopolistic competition or a small oligopoly)—it can charge a price that’s higher than its average cost in the short run. The key is that this power isn’t permanent. In a perfectly competitive market, strong price control doesn’t last long; in other structures, it can persist a bit longer but still unattractively invites competition later.

• Product differentiation and brand appeal. When a firm differentiates its product—unique features, design, or a brand story that resonates with customers—it creates an edge. Customers are willing to pay more for what feels special. In the short run, that extra willingness to pay translates into profits that exceed normal returns, especially if competitors can’t quite imitate the value quickly.

• Temporary demand surges or cost advantages. Sometimes demand spikes for a short period: a new fashion release, a limited-edition gadget, or a temporary boost in tourism. If a firm is well-positioned to meet that surge with efficient production, profits can exceed the standard level. On the cost side, a temporary efficiency edge (like a one-off productivity improvement) can push profits above the norm as well.

• Operational leverage and fixed costs. In the short run, fixed costs stand as a hurdle that doesn’t vanish with a bump in sales. If a firm can spread those fixed costs over a larger number of units sold in a favorable period, average total costs fall per unit, boosting profits above the normal level—at least until more capacity is built or prices re-align.

What this looks like in practice

Picture a boutique coffee roaster that’s just found a loyal local following. Its beans are unique, and it’s built a brand around sustainable sourcing. In a month with several big local events, its sales skyrocket. The shop can sell its coffee at a premium because people perceive extra value: the experience feels artisanal, the aroma is part of the brand, and the supply is steady but not limitless. In that moment, total revenue exceeds total costs (including the opportunity costs of using the shop’s limited roasting capacity). Short-run prosperity—higher than normal profits—appears.

Now switch to a different scene: a tech startup with a clever app that becomes suddenly popular. In the early weeks, servers, marketing, and staff might stretch the budget, but demand is so high that those extra costs are more than offset by revenue. Again, you’re in the realm of abnormal profits for a short period. Yet the moment new competitors imitate the app or the market gets crowded, the advantage can erode. Abnormal profits shrink as the market moves toward normal profit levels.

A more down-to-earth example would be a local producer with a rare, in-demand craft—handmade furniture, say—whose skilled artisans are in short supply. If a wave of interest comes along, the business can raise prices while still keeping costs in check because demand outstrips capacity. In the short term, this translates into higher than normal profits. In the longer run, if other craftspeople imitate the style or prices normalize, profits might fall back.

Why this is not sustainable forever

Here’s the neat thing about markets: while a firm can ride a wave of higher profits for a spell, the wave tends to crest. New entrants or substitutes crop up. In monopolistic settings, rival firms may copy features, improve efficiency, or steal customers with better marketing. In perfectly competitive markets, any short-run profit above normal quickly attracts new sellers, snapping profits back toward the equilibrium where total revenue just covers total costs (including opportunity costs).

That’s why the phrase “higher than normal profits” is so apt. It captures the momentary brightness of profit that can exist in the short run, without implying a forever state. If you see a chart, it tends to spike briefly and then drift toward the norm as competition catches up.

Comparing key profit outcomes helps keep the picture clear

• Abnormal/economic profit: TR > total costs (explicit + implicit). The firm earns more than the opportunity costs of all resources used.

• Normal profit (zero economic profit): TR = total costs. The firm covers all explicit and implicit costs but doesn’t earn extra above them.

• Profit equal to opportunity costs: This phrasing is a way to describe normal profit—where the return just matches the next best alternative for the resources used.

• Losses: TR < total costs. The firm isn’t covering its costs, so resources could be allocated elsewhere more efficiently in the long run.

How this ties into IB HL economics topics

This topic threads through several core ideas you’ll encounter in HL: market structures, costs and revenues, and the dynamics of entry and exit. When you study monopolistic competition, oligopoly, or even some regulated markets, the story of short-run abnormal profits helps explain why firms behave the way they do—invest in differentiation, push for efficiency, or try to lock in customers through branding. It also sets the stage for discussions about long-run equilibrium, where the forces of competition tend to erode those temporary profits.

A few reflective questions you can ask yourself while reviewing:

• If a firm is earning higher than normal profits for a short period, what market features are making that possible? Is it price-setting power, product differentiation, or a demand spike?

• What would signal that these profits are likely temporary? How quickly might new entrants or imitators respond?

• How do explicit costs and implicit costs matter for judging whether profits are truly abnormal or merely normal?

• In a real world scenario, how would a government policy (like regulation or a tax) interact with this short-run profit burst?

Digressions that stay on track

You’ll hear terms like “economic profit” tossed around in class or in textbooks. A helpful way to remember: profit in the money sense is just revenue minus what you actually pay to produce, but economic profit adds a second layer—what you could have earned elsewhere with the same resources. That’s the notch that makes the concept sticky in a good way. It keeps you thinking not just about the price tag, but about incentives and opportunity.

If you’ve used a teaching resource or two to visualize these ideas, you’ll know that images of supply curves, demand curves, and cost curves aren’t just math. They’re maps of real-world behavior. When a firm shifts along a demand curve because of a perception of higher value, or when its average cost per unit changes as it scales production, the profit story changes too. It’s not mystical; it’s about incentives, constraints, and a dash of luck when demand surges.

A practical, human takeaway

For IB HL learners, the point to carry forward is simple: higher than normal profits can occur in the short run, but they’re typically a temporary feature of markets with some pricing power or distinctiveness. If you can frame a question around that idea—why profits spike briefly, what keeps them from lasting, and how competition exerts pressure—you’ve captured the essence of the concept.

If you’re ever stuck, bring it back to the core equation in your mind: revenue minus costs, including opportunity costs. If that difference is positive and larger than the normal return on capital in that industry, you’re looking at abnormal profits. And if it isn’t, you’re either in the normal profit range or facing losses. The rest is just color—real-world examples, business strategy moves, and the inevitable march of competition.

Final thoughts

Markets don’t let success stay on the shelf forever. They’re dynamic, a bit relentless, and often surprisingly practical. The short-run burst of higher than normal profits reminds us that economics isn’t about perfect predictions; it’s about understanding incentives, recognizing opportunities, and tracing how those opportunities meet constraints. When you can articulate that story clearly, you’ve got a solid handle on one of the more intuitive corners of IB HL economics.

Quick recap for mental anchors:

• Abnormal profits = economic profits = TR exceeds total costs (including opportunity costs).

• Short run can show higher than normal profits thanks to price power, differentiation, or demand surges.

• Long run tends to erode these profits as entry and competition rise.

• Zero economic profit = normal profit = breaking even in economic terms.

• Use real-world examples to illustrate, but stay mindful of the timing and market structure.

If you want a friendly check, ask yourself: what market features would sustain higher profits longer, and what forces would push them back to normal? That question often reveals a clean path from theory to real-world markets.

Would you like a couple of quick diagrams or a short practice prompt to test this concept in a practical, real-world context? I can tailor a simple scenario to help you visualize the short-run spike and the long-run adjustment.