Supernormal Profits in the Fashion Industry

Supernormal Profits in the Fashion Industry

The fashion industry is noted for the shows that are presented in the spring and fall to highlight upcoming collections. These shows target buyers, primarily of retailers, but are seemingly covered by the media as much for the people who are in the audience-often celebrities-as for the shows themselves. Some collections are not sold at retailers but instead are offered as limited editions; generally, however, the collections are offered at retailers as diverse as Target and Nieman Marcus. The prices that are charged for haute couture can be quite high, yet some observers wonder if the cost of creating those garments justifies the high price. If the price is significantly higher than the opportunity costs associated with the product, the seller can be said to be realizing a supernormal profit. This research considers how profit is defined from an economic point of view, what constitutes supernormal profit, how the fashion industry is structured with regard to price and cost, and whether the fashion industry does, indeed, generate supernormal profit as a rule.

In accounting, profit is equal to revenue less cost (“The Concept” n.p.). Companies can increase their profits by increasing their revenues at a higher rate than their costs increase. Companies can also increase their profits by decreasing their costs when their revenues are remaining steady over a given period of time. Companies that are not profitable cannot remain operational for long periods of time (Lackner n.p.).

When considering profit from an economic point of view, the definition changes from the definition used in an accounting environment. In economics, “normal” profit is the opportunity costs of the resources used by the owners of a company, including the owners’ time. Normal profit must be greater than zero over the long-term or the company will lose money. Opportunity cost is used because the opportunity cost indicates other way…

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