Consider a firm that has no fixed costs and that is currently losing money.
Consider a firm that has no fixed costs and that is currently losing money. Are there any situations in which it would want to stay open for business in the short run? If a firm has no fixed costs, is it sensible to speak of the firm’s distinguishing between the short run and the long run? LO10.5
In the short run, all resources are not variable in nature so some resources are assumed to be fixed in nature. Total costs are of two types, fixed costs, and variable costs. Fixed costs do not depend on the number of units produced but variable costs depend on the number of units produced. However, in the case of variable costs, it directly depends on the number of units produced. If a firm is producing output and is bearing losses it should not produce because it cannot fully cover variable costs if there are no fixed costs. Therefore, total revenue is less than total variable cost meaning that price is less than average variable cost, meaning that it is costing the firm if it produces output therefore the firm must shut down.
In the long run, all the costs are variable in nature but in the short run, there are fixed costs. Hence, in the case of the short run, there is a fixed cost and by the shutdown rule it must keep on producing if the price is greater than the average variable cost to cover some of the fixed costs. However, in long run, such is not the case.
There is no reason to continue its business operations as it would earn negative profit in the short run. However, in the long run, all the costs are variable and no cost can be classified under fixed costs.
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