Question

In the model of perfect competition presented in this course, the short-run model, we have seen there exists a set of potential market prices above the short-run ""shutdown point"

          In the model of perfect competition presented in this course, the short-run
model, we have seen there exists a set of potential market prices above the
short-run ""shutdown point"

Added by Kyle J.

Principles of Economics

Gregory Mankiw 8th Edition

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Solved by Expert Andrew Davis

09/07/2023

Step 1

In perfect competition, firms are price takers, meaning they have no control over the market price. They can only adjust their quantity of output to maximize their profit. Show more…

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In the model of perfect competition presented in this course, the short-run model, we have seen that there exists a set of potential market prices above the short-run "shutdown point" but below the long-run equilibrium as depicted on the graph below (the prices between P1 and P2). When the market price falls in this area, we conclude that the firm will be losing money. However, it is in their best interest to stay in business. Explain why this is the case. Why does a firm stay in business even if they are losing money? Why does this change when the price falls below the "shutdown point"? Price MC ATC P1 AVC P2 Quantity