A Level Economics AQA Practice Exam

What is meant by supernormal profit?

1. Profit that equals total revenue

2. Profit that is below the normal rate

3. Extra profit over normal profit

4. Losses sustained below the break-even point

The correct answer is: Extra profit over normal profit

Supernormal profit refers to the profit that exceeds the normal profit level, which is the minimum profit required to keep a firm in its current mode of production. Normal profit is often considered as the opportunity cost of capital and labor, where a firm's total revenues are equal to its total costs, including both explicit and implicit costs. When a firm achieves supernormal profit, it indicates that it is earning more than this normal profit threshold, suggesting that its operations are not only covering all costs but are also generating additional earnings beyond what would be expected in a competitive market. This can result from factors such as having a unique product, reduced competition, or operating in an oligopoly or monopoly where firms can have more pricing power. In this context, other options refer to either breakeven points or levels of profit that do not surpass what is expected, thus distinguishing supernormal profit as the additional profit realized above normal profit.