shutdown condition

• Why do only some firms leave a loss-making industry in perfect competition when adjustments are made to the long run?

  Studying the shutdown condition
• The decision to minimize losses involves comparing the losses from shutting down versus continuing production
• If a firm in perfect competition shuts down, it still has to cover its fixed costs.
• What is the loss for Company A if it shuts down?

  100,000 pounds
• What is the loss for Company B if it continues producing?

  100,000 pounds
• All firms in the example are making losses whether they continue producing or shut down.
• Company C should continue producing because its revenue covers its variable costs
• Why might a company continue producing even if it makes the same loss as shutting down?

  Loyalty to customers
• Steps a firm like Company C might take if it continues producing while others leave the industry.

  1️⃣ Other firms exit the industry

  2️⃣ Supply curve shifts left

  3️⃣ Price increases

  4️⃣ Company C earns normal profit
• What is the shutdown condition in perfect competition?

  AR equals AVC
• If AR is less than AVC, a firm should definitely shut down.
• The breakeven condition occurs when AR equals AC
• What type of profit is earned when AR equals AC?

  Normal profit
• What does AR measure?

  Average revenue
• What does the marginal cost curve intersect at its minimum point?

  AVC and AC
• If a firm's AR is covering its AVC, it should continue producing in the short run.
• What happens to the supply curve when loss-making firms exit the market?

  Shifts to the left
• If AR is greater than AVC, a loss-making firm should continue producing
• Why might a firm with subnormal profit continue producing if AR exceeds AVC?

  To await normal profit