Abnormal Profit Definition

Published Dec 23, 2022

Definition of Abnormal Profit

Abnormal Profit is defined as the profit earned by a firm that is above and beyond the normal rate of return. That means it is the profit earned by a firm that is higher than the average rate of return for firms in the same industry.

Example

To illustrate this, let’s look at an imaginary company called ABC Inc. ABC Inc. is a manufacturer of widgets and has been in business for several years. The average rate of return for widget manufacturers is 10%. However, ABC Inc. has managed to achieve a rate of return of 15%. This means that ABC Inc. is earning an abnormal profit of 5%.

Why Abnormal Profit Matters

Abnormal profit is an important concept for understanding the competitive landscape of an industry. It shows that some firms are able to outperform their competitors and earn higher profits. This can be due to a variety of factors, such as better management, better technology, or better access to resources.

Abnormal profit is also an important concept for investors. It shows that some firms are able to generate higher returns than the average, which can be attractive for investors looking for higher returns. Finally, it can also be used to identify potential areas of improvement for firms that are not performing as well as their competitors.

Important Disclaimer: This definition was written by Quickbot, our artificial intelligence model trained to answer basic questions about economics. While the bot provides adequate and factually correct explanations in most cases, additional fact-checking is required. Use at your own risk.