THE FIRM’S LONG RUN DECISION TO EXIT OR ENTER A MARKET

A firm’s long-run decision to exit a market is similar .to its shutdown decision. If the firm exits, it will again lose all revenue from the sale of its product, but now it Will save not only its variable costs of production but also its fixed costs. Thus, the firm exits the market if t~e revenue it would get from producing is less than its total costs.

We can again make this criterion more useful by writing it mathematically. If TR stands for total revenue, and TC stands for total cost, then the firm’s exit criterion can be written as

Exit if TR < tc

A parallel analysis applies to an entrepreneur who is considering starting a firm. The firm will enter the market if such an action would be profitable, Which occurs if the price of the good exceeds the average total cost of production. The entry criterion is.

Enter if P >,ATC.

We can now describe a competitive firm’s long-run profit-maximizing strategy. If the firm is in the market, it produces the quantity at which marginal cost equals the price of the good. Yet if the price is less than average total cost at that quantity, the firm chooses to exit (or’ not enter) the market. These results are illustrated in Figure 4. The competitive firm s long-run supply curve is the portion of its marginal-cost curve that lies above average total cost.

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