Final answer:
An entrepreneur earns a normal profit when total revenue is equal to the sum of explicit and implicit costs. This indicates that all costs, including a normal return on investment, are covered, but no additional profit is made. In the long run, normal profit is necessary for business sustainability.
Step-by-step explanation:
When total revenue earned by an entrepreneur is equal to the sum of explicit and implicit costs, then the entrepreneur earns a normal profit. To understand this, one must first recognize the difference between accounting profit and economic profit. Accounting profit is calculated as total revenues minus explicit costs, while economic profit also deducts implicit costs, which include the opportunity costs of an entrepreneur's own resources.
In the concept of economic profit, both explicit and implicit costs are considered to understand the true profitability of a business. According to the formula:
- Economic profit = total revenues - explicit costs - implicit costs
When total revenues are equal to the sum of explicit and implicit costs, the economic profit is zero. This condition indicates that the entrepreneur is covering all costs, including a normal return on investment, but is not earning extra profit beyond that. In the long run, achieving a normal profit is essential for a business to sustain itself without incurring losses.