Question

What is the difference between the firm’s shut down point in the short run and in the long run? Why are firms willing to accept losses in the short run but not in the long run?

Answer 1

The shutdown refers to a decision in the short run while exit refers to the long run decision to leave the industry. When economic profit is zero the firm operates; however when the economic profit is negative from operating, the firm shuts down when the loss from operating exceeds total fixed cost; or total revenue is lesser than total variable cost; or price is lesser than average variable cost; average revenue is lesser than average variable cost at all output levels. The​firm’s exit point in the long run is the minimum point on the average total cost curve.

In the short run the fixed costs have no impact on a firm decision but the variable costs and revenues impacts the short run profits. If the firm shutdown for the short run, it will be required to pay fixed costs and cannot leave the industry. But in the long run there are no fixed costs and firm cannot incur losses indefinitely. Thus firms are willing to accept losses in the short run however not in the long run