3.6 Shut down or keep going? Entry and exit

The short-run shutdown rule

In the short run, fixed costs must be paid even if the firm makes nothing. So the question is: does revenue at least cover variable costs?

• P ≥ AVC: keep producing. Any revenue above variable cost helps pay the fixed costs, so the loss is smaller than FC.
• P < AVC: shut down. The loss is then just FC.