In the short run, do perfectly competitive firms have a loss of profit or a break even when MC = AVC? Do these firms choose whether to produce or shutdown or both? Do they choose to produce nothing or a specific quantity or both?
If MC = ATC in the short run for perfectly competitive firms, are they making a break even or profit?
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I understand that in the short run, perfectly competitive firms are only interested in the variable costs rather than the total costs. But, I don't know if they are making zero profit or a loss, what they decide to produce,and whether they will keep producing or start shutting down? I think in the short run firms keep producing above the AVC, so for ATC, they are making a profit, correct?
Firms will produce where MC=MR. In a perfectly competitive market, MR=Price (P). So, if MC=ATC=P, the firm is exactly breaking even. Now then, if MC=AVC=P and AVC<ATC (because of some fixed costs, then the firm is taking a loss and should shut down.
The point about fixed costs is that the firm will need to pay the costs regardless of the level of production,
In the short run, if price is above AVC but below ATC, the firm is covering all of its variable costs and covering some (but not all) of its fixed costs. The firm should continue to produce even though it is taking a loss. Hopefully, the return can return to profitability, However, the situation cannot continue indefinately. If because of fixed costs, the firm loses money each year, the firm must eventually shut down.
In the short run, perfectly competitive firms determine their profit or loss by comparing the marginal cost (MC) with the average variable cost (AVC). Let's break down your questions:
1. When MC = AVC, perfectly competitive firms are neither making a profit nor a loss. They are operating at the break-even point because the revenue they generate from selling their output is equal to their variable costs. This means they cover all their expenses but do not make any additional profit.
2. In the short run, perfectly competitive firms have the option to either produce or shut down. However, they do not have control over the price, which is determined by the market. If the market price is above the average variable cost (AVC), firms will choose to produce because they can at least cover their variable costs. If the market price is below the AVC, they will choose to shut down because producing would result in a loss greater than not producing.
3. Perfectly competitive firms will produce a specific quantity that maximizes their profit or minimizes their loss. This quantity is determined by the intersection of the marginal cost (MC) and the market demand curve. At this point, the additional cost of producing one more unit (MC) is equal to the additional revenue derived from selling that unit. If MC is below the market price, firms will increase production until MC matches the market price. If MC is above the market price, firms will decrease production to reduce losses.
Now let's address your second set of questions:
4. If MC = ATC in the short run for perfectly competitive firms, they are making a normal profit. The average total cost (ATC) includes both the variable and fixed costs. When MC is equal to ATC, the firm is covering all its costs, including a normal return on its investment. This means they are not making any above-normal economic profit but are still making a profit sufficient to compensate for their opportunity costs.
I hope this clarifies the profit/loss situation, production decisions, and the relationship between MC, AVC, and ATC for perfectly competitive firms in the short run.