<p><span class="math-container">$AVC&lt;AR$</span> means, without considering fixed cost, the firm is making a profit of <span class="math-container">$AR-AVC&gt;0$</span> per unit of output. Compare the two options: keep producing vs  shutdown: </p>

<ul>
<li>Keep producing: <span class="math-container">$\text{Avg Profit}=\underbrace{AR-AVC}_{&gt;0}-AFC$</span></li>
<li>Shutdown: <span class="math-container">$\text{Avg Profit}=0-AFC$</span></li>
</ul>

<p>Since <span class="math-container">$AVC&lt;AR$</span>, staying in production is better since the revenues can be used to offset part of the fixed costs already incurred.</p>

<hr>

<p><span class="math-container">$AVC&gt;AR$</span> means, without considering fixed costs, the firm is making a loss of <span class="math-container">$AR-AVC&lt;0$</span> per unit of output. Compare the two options: keep producing vs shutdown: </p>

<ul>
<li>Keep producing: <span class="math-container">$\text{Avg Profit}=\underbrace{AR-AVC}_{&lt;0}-AFC$</span></li>
<li>Shutdown: <span class="math-container">$\text{Avg Profit}=0-AFC$</span></li>
</ul>

<p>Since <span class="math-container">$AVC&gt;AR$</span>, shutting down leads to a smaller loss than staying in production. </p>

CC BY-SA 4.0
2019-04-21T19:18:26.583Z
2019-04-22T04:19:36.920Z
2019-04-22T04:19:36.920Z
Herr K.
<h2>Question:</h2>

<p><strong>Why do perfectly competitive, loss-making firms that have (AC>AVC>AR) shutdown but</strong></p>

<p><strong>Firms that have (AC>AR>AVC) not shutdown?</strong></p>

<p>-Both of these types of firms are making a loss. How is it significant that the latter type's AVC is less than AR ? How does that affect whether it shuts down ?**</p>

<p>These two graphs are for the two types of firms in perfectly competitive markets:</p>

<ul>
<li>Loss-making firms where their AC > AR &amp; AVC > AR that shutdown
<a href="https://i.sstatic.net/wcQZY.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/wcQZY.png" alt="diagram1"></a></li>
<li>Loss-making firms where their AC > AR &amp; AVC &lt; AR that don't shutdown.
<a href="https://i.sstatic.net/ksoXb.png" rel="nofollow noreferrer"><img src="https://i.sstatic.net/ksoXb.png" alt="diagram2"></a></li>
</ul>

CC BY-SA 4.0
2019-04-22T03:30:09.520Z
Your inequalities need to be fixed, I think for the firms that shut down AC>AVC>AR, and for the firms that don't shut down AC>AR>AVC. Can you please fix it for future clarity. Your graphs are fine.
Regio
<microeconomics><competition><firm><theory-of-the-firm>
Why do some perfectly competitive, loss-making firms shutdown and others don't?
Tom
# Why do some perfectly competitive, loss-making firms shutdown and others don't?

(Asked by: username_0 on 2019-04-20)

## Question:

**Why do perfectly competitive, loss-making firms that have (AC>AVC>AR) shutdown but**

**Firms that have (AC>AR>AVC) not shutdown?**

-Both of these types of firms are making a loss. How is it significant that the latter type's AVC is less than AR ? How does that affect whether it shuts down ?\*\*

These two graphs are for the two types of firms in perfectly competitive markets:

* Loss-making firms where their AC > AR & AVC > AR that shutdown
  [![diagram1](https://i.sstatic.net/wcQZY.png)](https://i.sstatic.net/wcQZY.png)
* Loss-making firms where their AC > AR & AVC < AR that don't shutdown.
  [![diagram2](https://i.sstatic.net/ksoXb.png)](https://i.sstatic.net/ksoXb.png)

**Tags:** microeconomics, competition, firm, theory-of-the-firm
> **Comments:**
> **username_1**: Your inequalities need to be fixed, I think for the firms that shut down AC>AVC>AR, and for the firms that don't shut down AC>AR>AVC. Can you please fix it for future clarity. Your graphs are fine.  

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## 1 answers

### Answer by username_2 on 2019-04-21. Score: 5

$AVC means, without considering fixed cost, the firm is making a profit of $AR-AVC>0$ per unit of output. Compare the two options: keep producing vs shutdown:

* Keep producing: $\text{Avg Profit}=\underbrace{AR-AVC}\_{>0}-AFC$
* Shutdown: $\text{Avg Profit}=0-AFC$

Since $AVC, staying in production is better since the revenues can be used to offset part of the fixed costs already incurred.

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$AVC>AR$ means, without considering fixed costs, the firm is making a loss of $AR-AVC<0$ per unit of output. Compare the two options: keep producing vs shutdown:

* Keep producing: $\text{Avg Profit}=\underbrace{AR-AVC}\_{<0}-AFC$
* Shutdown: $\text{Avg Profit}=0-AFC$

Since $AVC>AR$, shutting down leads to a smaller loss than staying in production.


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