3.6 Firms’ Short-Run Decisions to Produce and Long-Run Decisions to Enter or Exit a Market

Explain (using graphs or data where appropriate) firms’ short-run decisions to produce positive output levels, or long-run decisions to enter or exit a market in response to profit-making opportunities.

• In the short run, firms decide to operate (i.e., produce positive output) or shut down (i.e., produce zero output) by comparing total revenue to total variable cost or price to average variable cost (AVC).
• In the absence of barriers to entry or exit, in the long run (i.e., once factors that are fixed in the short run become variable), firms enter a market in which there are profit-making opportunities and exit a market when they anticipate economic losses.
• Enduring understanding PRD-2: Firms’ short-run decisions to produce output, and long-run decisions to enter or exit a market, are based on profitability.