#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.

Exhibit 21
Revenue–Cost RelationshipShort-Run DecisionLong-Term Decision
TRTCStay in marketStay in market
TR > TVC but TR < TFC + TVCStay in marketExit market
TR < TVCShut down production to zeroExit market


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