Question

Consider you are a Chief Manager of a firm that is operating in a market where any firm can enter or exit without any barrier. At present, your competitors are in crises and your firm too is facing losses. But you firmly decided to remain in the market and not to shut-down your business. Explain the what economic rule constitute for your decision ‘not to shut-down’. Also explain how you would overcome the short-run losses in long-run, and what kinds of economies you could achieve in future if you decide to stay in the business?

Answer 1

Solution - I will discuss the whole situation in different subparts of this solution below under the major headlines:-

1. Market- As described through the characteristics the markets seems very close to Perfect Competition Market

• There is no barrier on entry and exit of firms
• Businesses are price takers, not price makers.
• Most Importantly business houses make a normal profit in the long run & abnormal (Supernormal profit) in the short run
• Almost Identical Units are produced and that is the reason that competition is prevailing in the market.

2. Situational Analysis- Now Let's discuss the specific situation of our problem in the given below bullet points

• Our Firm suppose named as ABC Ltd. is facing losses.
• The Competitors of ABC Ltd. are also in crisis.
• ABC Ltd Decided not to shut down and operate through this phase to make an improvement in the situation.

3. Economic Rule Which Constitutes the Decision not to shut down- ABC Ltd. decided not to shut down and stay in the market because according to the characteristics of the perfect competition market a firm in short run may incur an abnormal profit which means also losses sum times but in the long run they earn normal profits.

• If they will stay in the market obviously the other loss-making companies will exit the market until and unless only that much player remains in the market which earns normal profit because if there will be abnormal profits it will attract more new entrants to the market as it is barrier-free market and when there will be losses the firms will exit the market until and unless the normal profit condition occurs but this phenomenon works only in long run. So the strategy behind staying in the market by ABC Ltd will only earn it normal profit

4. Efficeincy to be achieved- The firm can achieve various efficiency or economies in the long run from which a few important ones are given below:

• As according to the characteristics of the market all the products are homogeneous but still there is some scope of innovation and uniqueness which can attract the buyers however this innovation normally doesn't give an edge to the business because rival firms also start to work on the similar kind of innovations which attracts the customers and hence drive the market again to normal profit conditions.
• Production efficiency or economies of scale can also be achieved through large amount manufacturing which brings down the per unit cost of the product