Question

Simply explain the difference between normal and excess (economic) profits.

Answer 1

Normal profit incurs when the price is equal to average total cost so that firm earns o profit. No firm enter or exit in this situation so it is called normal profit. In perfect competition firms, in the long run, earn normal profit.

Excess profit occurs when the price is more than average total cost so that firm earns a positive profit. New firms enter because of this excess profit. In the short run, firms can earn excess profit but in the long run firms earn a normal profit as supply increases in the long run because of the new entrance, which decreases the price until it equals to average total cost.