A firm has to focus on both outputs and revenue to be successful in a market where a firm should have to find a level of output that maximizes profit. For this, a firm has to set marginal revenue (MR) equals marginal cost (MC) (Felder, 1990).
In contrary, there occurs an economic shutdown in a firm if marginal revenue is below average variable cost at the profit-maximizing output. Similarly, if the average variable cost (AVC) exceed the price at all output rates then the company will shut down in the short run. In other words, If the variable cost is greater than the revenue being made (VC>R) then the firm is not even covering production costs and it should be shut down. The output level at which price equals the AVC is called the shutdown point.
Furthermore, if the revenue from the sale of goods produced cannot cover the variable cost of a production then a firm has to implement a production shutdown. In today’s business the production shut down is temporary but when there is an improvement on the condition of the market as of the fall in production cost or increase in the price of the product then the firm can again resume its production. However, if the shutdown period becomes extended for a period of time then the firm should have to decide whether to continue or level the production of business.
References
Felder, J. (1990). Content Articles in Economics The Profit-Maximizing Firm: Old Wine in New Bottles. Journal of Economic Education, 21 (2), 17.
Guell, R. C. (2012). Issues in Economic Today (Sixth ed.). New York: McGraw-Hill.
For further actions, you may consider blocking this person and/or reporting abuse
We're a place where students share, stay up-to-date, learn and grow.
A firm has to focus on both outputs and revenue to be successful in a market where a firm should have to find a level of output that maximizes profit. For this, a firm has to set marginal revenue (MR) equals marginal cost (MC) (Felder, 1990).
In contrary, there occurs an economic shutdown in a firm if marginal revenue is below average variable cost at the profit-maximizing output. Similarly, if the average variable cost (AVC) exceed the price at all output rates then the company will shut down in the short run. In other words, If the variable cost is greater than the revenue being made (VC>R) then the firm is not even covering production costs and it should be shut down. The output level at which price equals the AVC is called the shutdown point.
Furthermore, if the revenue from the sale of goods produced cannot cover the variable cost of a production then a firm has to implement a production shutdown. In today’s business the production shut down is temporary but when there is an improvement on the condition of the market as of the fall in production cost or increase in the price of the product then the firm can again resume its production. However, if the shutdown period becomes extended for a period of time then the firm should have to decide whether to continue or level the production of business.
References
Felder, J. (1990). Content Articles in Economics The Profit-Maximizing Firm: Old Wine in New Bottles. Journal of Economic Education, 21 (2), 17.
Guell, R. C. (2012). Issues in Economic Today (Sixth ed.). New York: McGraw-Hill.