In a competitive market, how does the concept of normal profit relate to resource allocation when firms aim for profit maximization?

In a competitive market, normal profit is the minimum amount of profit needed for a firm to stay in business and cover its costs, including the opportunity costs of using its resources. When firms aim for profit maximization, they try to earn more than just normal profit, which encourages them to allocate their resources efficiently. For example, if a bakery can make more profit by using its ingredients to produce cakes rather than bread, it will focus on cakes to maximize its earnings. This process helps ensure that resources are directed toward producing goods that consumers want the most, ultimately leading to a better overall allocation of resources in the market. Thus, normal profit serves as a benchmark that keeps firms motivated to innovate and improve their offerings.