AP Microeconomics / Unit 3: Production, Cost, and the Perfect Competition Model
3.6 Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market
Notes
- Shut down in the short run if $P<\min AVC$.
- Keep operating at a loss if $AVC\le P<ATC$ (covers some fixed cost).
- Long run: firms enter if economic profit > 0, exit if losses.
Practice
$P=8$, $AVC=6$, $ATC=10$. In the short run the firm should:
Loss is smaller than fixed cost.
$P=5$ and minimum $AVC=6$. The firm should:
Can't cover variable costs.
Economic profits in a competitive industry attract:
Free entry.
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