Firms’ Short-Run Decisions to Produce & Long-Run Decisions to Enter/Exit a Market

Short-Run Decision Rule for Production

Produce if Price (P) is greater than or equal to Average Variable Cost (AVC) at Marginal Revenue (MR) = Marginal Cost (MC).

Shut Down Decision Rule

Shut down if Price (P) is less than Average Variable Cost (AVC) at Marginal Revenue (MR) = Marginal Cost (MC).

Long-Run Decision Rule for Market Entry

Enter the market if Economic Profit is greater than 0, then Price (P) is greater than Average Total Cost (ATC).

Long-Run Decision Rule for Market Exit

Exit the market if Economic Profit is less than 0, then Price (P) is less than Average Total Cost (ATC).

Staying in the Market Decision

Stay in the market if Economic Profit equals 0, which means Price (P) equals Average Total Cost (ATC); this indicates breakeven point or normal profit.

Key Idea for Short-Run Decisions

In the short run, firms focus on covering variable costs because some costs are fixed.

Breakeven Point

Occurs when Price (P) equals Average Total Cost (ATC), indicating that resources are being used efficiently.