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Unformatted text preview: variable costs. If the price is still higher than the average variable cost, it will continue production, if the price is lower than the average variable cost, it will shut down. P > AVC : continue production in the short run P < AVC : stop production in the short run Why is this? Think about it this way: in the first case, the firm is losing money in the big picture. Each unit that they make incurs some variable cost, but because that cost is lower than the price, they keep producing, since they can still recoup some of their losses by continuing production. 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....
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- Fall '08