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Short Run Shutdown Decision definitions

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  • Perfect Competition
    A market structure where firms are price takers due to identical products and many sellers, leading to horizontal demand curves.
  • Short Run
    A period in which at least one input, typically fixed costs, cannot be changed, affecting production decisions.
  • Fixed Cost
    An expense that remains unchanged regardless of output, such as rent, and must be paid even if production stops.
  • Variable Cost
    An expense that changes with the level of output, like seeds for a farmer, and is avoidable if production ceases.
  • Sunk Cost
    An unrecoverable expense, such as prepaid rent, that cannot be refunded or avoided, regardless of future actions.
  • Shutdown Point
    The output level where market price equals the minimum average variable cost, below which production halts temporarily.
  • Average Variable Cost
    The per-unit variable expense, crucial for determining whether a firm should continue producing in the short run.
  • Average Total Cost
    The per-unit sum of all expenses, both fixed and variable, used to assess profitability at a given output.
  • Marginal Cost
    The additional expense incurred from producing one more unit, guiding the optimal output decision.
  • Marginal Revenue
    The extra income from selling one more unit, equal to price in perfect competition, and key for output decisions.
  • Profit Maximizing Quantity
    The output level where marginal revenue equals marginal cost, ensuring the highest possible profit or smallest loss.
  • Loss Minimization
    A strategy where a firm continues production if losses are less than fixed costs, even when not profitable.
  • Exit
    A permanent decision to leave a market, resulting in zero output and avoidance of all future costs.
  • Aggregate Supply
    The total quantity of goods firms are willing to produce at various price levels, influenced by short-run constraints.