1. (a) "A perfect competitive firm incurring losses in the short-run may loose even more by
shutting down." Discuss.
Answers
Answer:
The Shutdown Point
The possibility that a firm may earn losses raises a question: why can the firm not avoid losses by shutting down and not producing at all? The answer is that shutting down can reduce variable costs to zero, but in the short run, the firm has already committed to pay its fixed costs. As a result, if the firm produces a quantity of zero, it would still make losses because it would still need to pay for its fixed costs. Therefore when a firm is experiencing losses, it must face a question: should it continue producing or should it shut down?
As an example, consider the situation of the Yoga Center, which has signed a contract to rent space that costs $10,000 per month. If the firm decides to operate, its marginal costs for hiring yoga teachers is $15,000 for the month. If the firm shuts down, it must still pay the rent, but it would not need to hire labor. Table 1 shows three possible scenarios. In the first scenario, the Yoga Center does not have any clients, and therefore does not make any revenues, in which case it faces losses of $10,000 equal to the fixed costs. In the second scenario, the Yoga Center has clients that earn the center revenues of $12,000 for the month, but ultimately experiences losses of $13,000 due to having to hire yoga instructors to cover the classes. In the third scenario, the Yoga Center earns revenues of $20,000 for the month, but experiences losses of $5,000.
In all three cases, the Yoga Center loses money. In all three cases, when the rental contract expires in the long run, assuming revenues do not improve, the firm should exit this business. In the short run, though, the decision varies depending on the level of losses and whether the firm can cover its variable costs. In scenario 1, the center does not have any revenues, so hiring yoga teachers would increase variable costs and losses, so it should shut down and only incur its fixed costs. In scenario 2, the center’s losses are greater because it does not make enough revenue to cover its variable costs, so it should shut down immediately and only incur its fixed costs. If price is below the minimum average variable cost, the firm would lose less money by shutting down. In contrast, in scenario 3 the revenue that the center can earn is high enough that the losses diminish when it remains open, so the center should remain open in the short run.
Market areas work in a different aspect that describes the market working nature into Perfect Competition, Oligopoly, Monopoly and Monopolistic market.
EXPLANATION-
Perfect Competition is the state of the market where the larger numbers of buyers and sellers are present in the market. There would not be any effect on the exist and entry of new buyers or sellers. There are no restrictions for the entry and exit for the seller of the market. The price of the products is out of control due to the presence of a large number of buyers. When we talk about the losses in the perfect competition is the basic nature due to the uncontrollable price fluctuations in the market as the buyer numbers are also large in the market. Whereas the losses will get doubles when it comes to shutting down due to the presence of the larger buyer and not one will be interested to buy or undertake the firm at the willing prices decided by the owner.
Hence, it is said that a perfect competition market can incurred loss in the short term business running but it doubles up when the shutdown point comes in the business.
Learn more about the perfect competition and its nature - https://brainly.in/question/4069022