Goodwill represents the value of a firm's reputation and its ability to earn super profits (profits above normal profits).
Super Profit is calculated as:
Super Profit=Actual Average Profit−Normal Profit
When a firm earns normal profits:
Super Profit=Normal Profit−Normal Profit=0
Since there are no super profits, there is no goodwill.
When a firm is incurring losses:
The actual profit is negative (loss), which is even less than normal profit. This means super profit is negative, indicating the firm has no capacity to generate extra earnings. Hence, no goodwill exists.
Goodwill arises only when a firm consistently earns more than normal profits, indicating superior earning capacity due to factors like brand reputation, customer loyalty, strategic location, or efficient management. Without super profits, these intangible advantages don't exist or aren't generating value, resulting in no goodwill.