Authors libby rittenberg 486

In the short run, a firm has one or more inputs whose quantities are fixed That means that in the short run the firm cannot leave its industry Even if it cannot cover all of its costs, including both its variable and fixed costs, going entirely out of business is not an option in the short run The firm may close its doors, but it must continue to pay its fixed costs It is forced to accept aneconomic loss, the amount by which its total cost exceeds its total revenue Suppose, for example, that a manufacturer has signed a 1-year lease on some equipment It must make payments for this equipment during the term of its lease, whether it produces anything or not During the period of the lease, the payments represent a fixed cost for the firm A firm that is experiencing economic losses—whose economic profits have become negative—in the short run may either continue to produce or shut down its operations, reducing its output to zero It will choose the option that minimizes its losses The crucial test of whether to operate or shut down lies in the relationship between price and average variable cost Producing to Minimize Economic Loss Suppose the demand for radishes falls to D2, as shown in Panel (a) of Figure 9.8 "Suffering Economic Losses in the Short Run" The market price for radishes plunges to $0.18 per pound, which is below average total cost Consequently Mr Gortari experiences negative economic profits—a loss Although the new market price falls short of average total cost, it still exceeds average variable cost, shown in Panel (b) as AVC Therefore, Mr Gortari should continue to produce an output at which marginal cost Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 486