Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 5 Firm Behavior and the Organization of Industry
Chapter 14 of 36
Firms In Competitive Markets
Section 15 of 24
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Why does an almost empty restaurant stay open?
It might seem the revenue from the few customers does not cover the cost of running the restaurant.
A restaurant owner makes a distinction between fixed and variable costs.
Many of a restaurant's costs are fixed, including rent, kitchen equipment, tables, plates, and silverware.
Shutting down during lunch would not reduce these fixed costs, they are sunk in the short run.
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When the owner is deciding whether to serve lunch only the variable costs are relevant, including the costs of the additional food ingredients and staff wages.
The owner shuts down the restaurant at lunch time only if the revenue from the few lunch time customers does not cover the restaurant's variable costs incurred serving them.
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An owner of a miniature golf course makes a similar decision.
Because revenue varies substantially from season to season the firm must decide when to open and when to close.
The fixed costs including land, building, course, are not relevant in making this decision.
The golf course is open only during those times of year when revenue exceeds variable costs.
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