posted by Anonymous on .
In the short run, do perfectly competitive firms have a loss of profit or a break even when MC = AVC? Do these firms choose whether to produce or shutdown or both? Do they choose to produce nothing or a specific quantity or both?
If MC = ATC in the short run for perfectly competitive firms, are they making a break even or profit?
I understand that in the short run, perfectly competitive firms are only interested in the variable costs rather than the total costs. But, I don't know if they are making zero profit or a loss, what they decide to produce,and whether they will keep producing or start shutting down? I think in the short run firms keep producing above the AVC, so for ATC, they are making a profit, correct?
Firms will produce where MC=MR. In a perfectly competitive market, MR=Price (P). So, if MC=ATC=P, the firm is exactly breaking even. Now then, if MC=AVC=P and AVC<ATC (because of some fixed costs, then the firm is taking a loss and should shut down.
The point about fixed costs is that the firm will need to pay the costs regardless of the level of production,
In the short run, if price is above AVC but below ATC, the firm is covering all of its variable costs and covering some (but not all) of its fixed costs. The firm should continue to produce even though it is taking a loss. Hopefully, the return can return to profitability, However, the situation cannot continue indefinately. If because of fixed costs, the firm loses money each year, the firm must eventually shut down.