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