Question

Why might a business owner keep their business open but let it deteriorate, rather than shut it down? Will this profitability last?

Answer 1

A business owner keep their business open but let it deteriorate when the price is less than the average total costs but more than the average variable costs. This is because the firm will continue producing so long as the firm is able to recover the variable costs. the moment firm is unable to recover its variable costs it must shut down. A point to note is that in both competitive markets, i.e. monopolistic competition and perfect competition, the firms experience losses or positive economic profits in the short run. in the long run both markets will earn normal profits. A loss in the short run will make some firms exit the market and reduce the supply. this decreased supply will increase the industry market price and the process will continue until price equals average total cost and firm earns normal or profits zero economic profits in the long run. Similarly if the firms are earning positive economic profits in the short run, some firms will enter the market attracted by economic profits. This will increase the supply and reduce the market price to the extent that price equals the average total cost. in any case the price will be equal to the average total cost in the long run and firms will earn NORMAL PROFITS only.