#cfa #cfa-level-1 #economics #reading-15-demand-and-supply-analysis-the-firm #section-3-analysis-of-revenue-costs-and-profit
The firm must cover variable cost before fixed cost.
In the short run, if total revenue cannot cover total variable cost, the firm shuts down production to minimize loss, which would equal the amount of fixed cost.
If total variable cost exceeds total revenue in the long run, the firm will exit the market as a business entity to avoid the loss associated with fixed cost at zero production.
By terminating business operations through market exit, investors escape the erosion in their equity capital from economic losses.
When total revenue is enough to cover total variable cost but not all of total fixed cost, the firm can survive in the short run but will be unable to maintain financial solvency in the long run.
|Revenue–Cost Relationship||Short-Run Decision||Long-Term Decision|
|TR ≥ TC||Stay in market||Stay in market|
|TR > TVC but TR < TFC + TVC||Stay in market||Exit market|
|TR < TVC||Shut down production to zero||Exit market|