# extraordinary-profit

# extraordinary-gains

## Definition

Extraordinary profit (or extraordinary gains) refers to profits that exceed the ordinary rate of profit in a neighbourhood, typically arising from temporary market conditions, monopolies, or special advantages. These profits attract new competitors and tend to be eliminated over time as the market adjusts, causing market prices to return to natural prices. They may also arise from discoveries, monopolies, or temporary scarcities.

## Source Chapter

Book 1, Chapter 7: "OF THE NATURAL AND MARKET PRICE OF COMMODITIES."

## Context

Smith discusses extraordinary profits as temporary deviations from normal market conditions. He explains how they arise from various causes including monopolies, temporary scarcities, and special advantages, and how they tend to be eliminated by market competition as new entrants are attracted by the higher returns.

## Economic Domain

Exchange

## Smith's Original Wording

"When, by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market, are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and, perhaps, for some time even below it."

## Modern Interpretation

Extraordinary profits represent temporary supernormal returns that signal market opportunities to competitors. Their elimination through market entry demonstrates the equilibrating tendency of competitive markets, a fundamental principle in classical and neoclassical economics.