Normal profit is the base profit which a business needs to earn in order for someone to keep the business going. It could be considered the profit which a business owner would reasonably expect to earn in order to break even. When businesses earn less than this, it is an indicator that they should switch industries or make other changes to their practices. Businesses which exceed this are doing well, and create an incentive for additional businesses to enter the market.
In an economy with perfect competition, businesses would theoretically all remain in a state of normal profit. If businesses started to earn more, other businesses would enter the market in the hopes of making profits as well, and this would drive the profit level back down to normal. However, perfect competition does not exist in any known markets, and thus true normal profit is very unusual.
Within the market, different sectors make differing degrees of profits. In some areas of the market, profit is actually relatively low. Other areas of the market demonstrate very large profits, although there may also be a corresponding high risk for people involved in those industries. It can also be challenging to break into industries where profits are high because companies may have refined their business practices and offerings in a way which makes it difficult for competitors to enter the market.
A business making normal profit is making enough money to cover the expenses associated with running the business, including costs such as the time and energy invested in the business by the owner. Excess economic profits indicate that a business is pulling in more money than it needs to meet its expenses. These profits can be used to expand and grow the business, or to provide bigger payouts to key members of the business.
When people establish a new business, one of the things they do is make projections which will be used in the long term. The business may be expected to take a loss at first, gradually increasing profits to a point of normal profit, and then to eventually start earning more. Setting targets and goals can help people when the evaluate the efficiency and long term viability of a business. For example, if a restaurant owner believes that the business should break even in two years and it is still taking a loss at four years, it may be time to close the business and move on to something else.
