In the second case

In the second case - In the second case, each additional...

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In the second case, each additional unit of goods incurs more costs than revenue, since the average variable costs are higher than the selling price of the goods. It doesn't make sense for the firm to keep producing, since it will only make their losses even greater. In the long run, firms make the decision either to stay in the market, or to leave the market. (Leaving the market is different from stopping production: a firm can temporarily halt production with the intention of starting up once it becomes profitable again. Leaving the market is much more permanent.) How do they make this decision? Firms still look at the relationship between their average cost (AC) and price. In the short run, firms will sometimes decide to continue production even if their costs exceed the market price, in the long run firms will exit the market if P < AC, since they are losing money, and they have the option to leave the market. When prices rise in a market, more firms will enter, since they will be able to produce goods at a lower average cost
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This note was uploaded on 12/13/2011 for the course ECO 1320 taught by Professor Staff during the Fall '11 term at Texas State.

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