Do supernormal profits only exist in the absence of competition?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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Supernormal profit is defined as the difference between the total revenues earned by a firm and the costs incurred by the firm in doing so. In the long run it is not possible for a firm to earn supernormal profits when there is perfect competition. This is due to the fact that in perfect competition, the number of firms that can enter the market is not limited by any factor. As the number of firms increase, there is a corresponding decrease in the profits earned by each firm until it falls to a value called normal profits. If profit were to drop below normal, firms would exit the market and that would increase profits for the rest and bring it back to the level of normal profits.

Supernormal profits can be earned in the presence of competition, but this is limited to a short duration of time. In the long run it is possible to earn supernormal profits only if the number of competitors can be controlled.

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