A firm will shut down in the short run if, for all positive levels of output?

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lost place, concourse, old @ Pixabay

Some firms will shut down in the short run if, for all positive levels of output, they have a zero or negative economic profit. This is because there are no profits left to cover the fixed costs associated with running the business.

For example, if a firm has $1 million in revenue and $200 thousand in variable costs at any level of production (output), then their total cost is $300 thousand per unit of output. The last dollar earned doesn’t cover anything!

SHUT DOWN IN SHORT RUN

If this happens across all levels of production, then it’s not profitable to produce more than one unit and that means shutting down operations until prices rise again. When we make the assumption that firms are maximizing their profits, this should be a rare situation.

This is because there would have to be a price level at which all of the firm’s goods can’t profitably sell and they’re left with a total revenue that isn’t enough to cover fixed costs. In other words, prices must rise until one unit will produce an economic profit for each additional unit sold; otherwise it won’t be profitable to produce more than one unit per period.

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