Tuesday, April 21, 2015

For a firm to operate in the shortrun the total revenue must at least be equal to Why?

For a firm to operate in the shortrun the total revenue must at least be equal to Why?
A firm would still operate if revenues are below total coots, but not if revenues are below variable costs.

The reason is that as long as revenues are above variable costs, the firm will earn a difference to contribute to the fixed costs (fixed costs are costs that a company has to pay in the short-run whether it operates or not). If the firm stops operating in the short-run, it will have to pay for the full fixed costs (e.g., rent, some fixed labour)

If revenues are below variable costs, for every unit of production, the company loses the difference and does not contribute to the fixed costs. It is more economical to shutdown in the short-run.

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