4. If the price in the market were to change to P2, the firm would set its new level of output by equating marginal revenue and marginal cost. 5. Because the firm's marginal cost curve determines how much the firm is willing to supply at any price, it is the competitive firm's supply curve. C. The Firm's Short-Run Decision to Shut Down Figure 14.2
4 1. In some circumstances, a firm will decide to shut down and produce zero output. 2. There is a difference between a temporary shutdown of a firm and an exit from the market. a. A shutdown refers to the short-run decision not to produce anything during a specified period of time because of current market conditions. b. Exit refers to a long-run decision to leave the market. c. One important difference is that, when a firm shuts down temporarily, it still must pay fixed costs. 3. If a firm shuts down, it will earn no revenue and will have only fixed costs (no variable costs). 4. Therefore, a firm will shut down if the revenue that it would get from producing is less than its variable costs of production: Shut down if TR< VC. 5. Since TR= Px Qand VC= AVCx Q, we can rewrite this condition as: Shut down if P< AVC. 6. We now can tell exactly what the firm will do to maximize profit (or minimize loss). If: The Firm Will: P≥ AVCProduce output level where MR= MCP< AVCShut down and produce zero output c. The price that coincides with the minimum point on the average variable cost curve is referred to as the shutdown price. 7. For prices above the short run shutdown price, the competitive firm's short-run supply curve is the portion of its marginal revenue curve that lies above average variable cost. For prices from zero up to the shutdown price, the firm supplies zero output. The short-run supply curve lies along the vertical axis.