What is the difference between economic profits and normal profits? What effects do these different types of profits have on the number of firms in an industry?

Economic profit is the difference between a firm's total revenue and its total opportunity costs, which includes both explicit costs (such as labor and capital) and implicit costs (such as the opportunity cost of the entrepreneur's time and investment). In other words, economic profit accounts for all costs of production, including the costs associated with using resources in their next-best alternative use.

Normal profit, on the other hand, is the minimum level of profit required for a firm to remain in business. It represents the point at which a firm's total revenue is just enough to cover its explicit and implicit costs, with no additional profit left over. A firm earning normal profit is earning just enough to make it worth staying in the industry, meaning that the opportunity costs of the entrepreneur's time and investment are fully compensated.

The key difference between economic profits and normal profits is that economic profits represent a surplus above and beyond normal profits. If a firm is earning economic profit, it is making more than the minimum return necessary to cover its opportunity costs and keep the entrepreneur satisfied. In contrast, a firm making normal profit is simply covering its costs without earning any surplus.

Economic profits have a significant impact on the number of firms in an industry. When firms in an industry are earning economic profits, this serves as a signal for new entrants to enter that market. The prospect of high returns attracts more firms, which increases competition and drives down prices. This process continues until the economic profits are eroded, and the firms in the industry only earn normal profits.

When firms in an industry are earning normal profits, it means that they are covering their costs and earning a return equal to the opportunity cost of their resources. There is no additional incentive for new firms to enter or for existing firms to exit the market. In such a scenario, the number of firms in the industry remains relatively stable, as there is no profit-driven force for firm entry or exit. In summary, economic profits attract new firms and stimulate competition within an industry, which ultimately erodes these profits and leads to a market equilibrium where firms earn normal profits. Normal profits provide stability in the industry, with no additional incentive for firms to enter or exit the market.