Short-Run Shut Down Decision

Question: Discuss about the Short-Run Shut Down Decision. Answer: Introduction: In the short run at least one factor of production is fixed while others are variable in the production process. If the market price for goods falls below average total cost for example due to cheaper substitute the firm faces several alternative decisions. Costs influence the shut-down decisions since the firms total fixed costs will still be incurred regardless of the level of production a firm may opt not to shut-down if demand for its products and loss incurred in production is lower than total fixed costs. In the long run as other firms shut down the firm anticipates an increase in the demand for its product which eventually returns the firms profit maximizing position where marginal revenue equals marginal cost (Hall Lieberman, 2012; Wang Yang, 2001). However, if the total loss of production is greater than total fixed costs the firm ought to shut-down to minimize economic losses. References Hall, R. E., Lieberman, M. (2012). Microeconomics: Principles and applications. Cengage Learning. Wang, X. H., Yang, B. Z. (2001). Fixed and sunk costs revisited. The Journal of Economic Education, 32(2), 178185.