What does "normal profits" mean in the context of long-run equilibrium?

In the context of long-run equilibrium, "normal profits" refers to a situation where firms are covering all costs, including both explicit costs and opportunity costs. This concept is grounded in the idea that normal profit is the minimum profit necessary for a company to remain competitive in the market.

When firms achieve normal profits, they are not making excess profits that would indicate monopolistic pricing; rather, they are earning just enough to cover every cost associated with their business operations. This includes costs related to resources and inputs as well as the opportunity costs of the owner’s time and capital.

In a perfectly competitive market, firms enter and exit freely, resulting in long-run equilibrium where economic profits approach zero. At this point, all firms earn normal profits, meaning they are sufficiently rewarded for their entrepreneurial efforts but are not incentivized to either leave the industry or attract new entrants with excess profits. This balance is critical for understanding how resources are allocated efficiently in competitive markets.