Net profit is the difference between Gross Profit and implicit costs. This net profit is again divided into two parts. One is normal profit and another is super normal or abnormal profit.
In perfect competition we have only these two types of net profit. In an imperfect competition market which is more realistic market net profit also includes monopoly profit. So the constituents of net profit are:
(a) Normal Profit
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(b) Abnormal or Super normal Profit
(c) Monopoly Profit
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(a) Normal Profit:
Normal Profit is the profit which is normally expected from an entrepreneur. It is the minimum profit which is necessary to induce an entrepreneur to start a business. Unless the entrepreneur expects this minimum gains he will not go for any business. Secondly, this is called functional income.
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Functional income refers income which arises from the functions of a factor. The function of the entrepreneur is to undertake risks and to bear uncertainty of business.
He also innovates new product. Thirdly, normal profit is the profit at which existing firms will not leave the industry and no new firms will enter the business. Lastly, normal profit is basically a long-run profit.
(b) Abnormal or Super Normal Profit:
Abnormal Profit is the excess and above the normal profit. According to Prof. Hansen, “any profit which accrues in addition to normal profit is called abnormal profit.” It arises mainly due to innovations and chance gains.
Usually a marginal entrepreneur gets normal profit who does the minimum functions of an entrepreneur like undertaking co-ordination, supervision, bearing risks etc. But the efficient and the able entrepreneurs earn more than the normal profit. This is called super normal profit. It is basically goes to entrepreneur for his innovative functions.
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Supernormal profits arise only in the short-run as a chance gain or windfall gains. By chance gain we mean the profits which entrepreneur gets because of favourable conditions created by certain extra-ordinary circumstances like war, flood, cyclone and drought. Crops fail and productions are disturbed. Supplies fall short of demand. Prices rise, profits increases. This increase is due to chance.
A competitive firm in the short-run and a monopolist both in the short and long-run may get super normal profit.
(c) Monopoly Profit:
Monopoly Profit is a part of net profit. It arises in a monopoly or imperfect market. A monopoly market is one where there is one seller of a commodity. He sells a commodity which has not near substitutes.
In such a market there are no rivals. Such a single seller of the market charges higher prices for his product without any difficult and reaps high profit.
This monopoly profit is also arises in case of monopolistic competition by selling slightly differentiated product by changing brand names packing, colour etc. at very high prices. Since this profit is arises due to presence of monopoly elements it is called monopoly profit.