Short Run and Long Run Decisions to Enter and Exit

when should a firm exit the market

when TR < TC divide both sides by Q to write the firms decision rule as: exit if P < ATC

so when should a firm shut down

when TR < VC - divide both sides by Q -so firms decisions rule is shut down if P < AVC

Sunk Costs

a cost that has already been committed and cannot be recovered sunk costs should be irrelevant to decisions; you must pay them regardless of your choice RC is a sunk cost: the firm must pay its FC whether it produces or shuts down

definition of an exit

a long run decision to leave the market

definition of a shut down

a short run decision not to produce anything because of market conditions

A firms long run decision to exit: the exit rules cost and benefits

cost: revenue loss = TR benefit: cost savings = TC

A competitive firms SR supply curve

the firms short run supply curve is the portion of its MC curve above AVC (they pay FC in SR) if P > AVC then firm produces Q where P=MC if P < AVC then firm shuts down ( produces Q=0)

The shut down rule

if the cost of shutting down is less than the benefit the firm should shut down cost: revenue loss=TR benefit: cost savings = VC

key difference between a shut down and an exit

in a shut down a firm still has to pay the fixed costs

A new firms decision to enter the market

in the long run a new firm will enter the market if it is profitable to do so: if TR > TC divide both sides by Q to express the firms decision as enter if P > ATC

The competitive firms supply curve

the firms LR supply curve is the portion of the MC curve above the ATC