when does a perfectly competitive firm shut down
Perfect competition
In the short run , a firm operating at a loss ( R < TC ( revenue less than total cost ) or P < ATC ( price less than unit cost ) ) must decide whether to continue to operate or temporarily shutdown . The shutdown rule states `` in the short run a firm should continue to operate if price exceeds average variable costs . '' Restated , the rule is that for a firm to continue producing in the short run it must earn sufficient revenue to cover its variable costs . The rationale for the rule is straightforward . By shutting down a firm avoids all variable costs . However , the firm must still pay fixed costs . Because fixed cost must be paid regardless of whether a firm operates they should not be considered in deciding whether to produce or shutdown . Thus in determining whether to shut down a firm should compare total revenue to total variable costs ( VC ) rather than total costs ( FC + VC ) . If the revenue the firm is receiving is greater than its total variable cost ( R > VC ) then the firm is covering all variable cost plus there is additional revenue ( `` contribution '' ) , which can be applied to fixed costs . ( The size of the fixed costs is irrelevant as it is a sunk cost . The same consideration is used whether fixed costs are one dollar or one million dollars . ) On the other hand , if VC > R then the firm is not even covering its production costs and it should immediately shut down . The rule is conventionally stated in terms of price ( average revenue ) and average variable costs . The rules are equivalent ( If you divide both sides of inequality TR > TVC by Q gives P > AVC ) . If the firm decides to operate , the firm will continue to produce where marginal revenue equals marginal costs because these conditions insure not only profit maximization ( loss minimization ) but also maximum contribution . 
In the short run , a firm operating at a loss ( R < TC ( revenue less than total cost ) or P < ATC ( price less than unit cost ) ) must decide whether to continue to operate or temporarily shutdown . The shutdown rule states `` in the short run a firm should continue to operate if price exceeds average variable costs . '' Restated , the rule is that for a firm to continue producing in the short run it must earn sufficient revenue to cover its variable costs . The rationale for the rule is straightforward . By shutting down a firm avoids all variable costs . However , the firm must still pay fixed costs . Because fixed cost must be paid regardless of whether a firm operates they should not be considered in deciding whether to produce or shutdown . Thus in determining whether to shut down a firm should compare total revenue to total variable costs ( VC ) rather than total costs ( FC + VC ) . If the revenue the firm is receiving is greater than its total variable cost ( R > VC ) then the firm is covering all variable cost plus there is additional revenue ( `` contribution '' ) , which can be applied to fixed costs . ( The size of the fixed costs is irrelevant as it is a sunk cost . The same consideration is used whether fixed costs are one dollar or one million dollars . ) On the other hand , if VC > R then the firm is not even covering its production costs and it should immediately shut down . The rule is conventionally stated in terms of price ( average revenue ) and average variable costs . The rules are equivalent ( If you divide both sides of inequality TR > TVC by Q gives P > AVC ) . If the firm decides to operate , the firm will continue to produce where marginal revenue equals marginal costs because these conditions insure not only profit maximization ( loss minimization ) but also maximum contribution .
In the short run, a firm operating at a loss must decide whether to continue to operate or temporarily shutdown. The rationale for the rule is straightforward.  By shutting down a firm avoids all variable costs. However, the firm must still pay fixed costs.
In the short run , a firm operating at a loss ( R < TC ( revenue less than total cost ) or P < ATC ( price less than unit cost ) ) must decide whether to continue to operate or temporarily shutdown . The rationale for the rule is straightforward . By shutting down a firm avoids all variable costs . However , the firm must still pay fixed costs .