Question

Provide and fully explain two reasons why the residual demand curve for a company producing a good in one market may have a different elasticity than a company producing a different good in another market. Provide and fully explain the shut-down decision for a perfectly competitive firm in the short-run and the long-run. Is the shut-down decision the same for both? Why or why not?

Answer 1

Residual demand curve is a demand where market demand not met by other sellers. This is because residual demand curve is much more flatter than the market demand curve. And the elasticity of residual demand is much higher than the market elasticity.

A short run shutdown is temporary. It does not mean the firm is going out of business. Likewise if the market conditions improves due to the production cost falling or price increasing, the firm can start their production. And it has to pay the fixed cost while shutdown and they are not allowed to leave the industry.

Where as

To leave the industry or to prevail in the industry it is totally the decision of long run market. As if the market conditions do not improves the firm can exist in the market. They donot have to pay for fixed cost or any other cost but also they donot earn any revenue.

Hence shutdown decision is not same for both short run and long run as in short run prevailing in the market is compulsory but in long run it is their firms decision. And short run incures the fixed cost but long run didn't incures any type of cost.