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 11 of 22
...
Figure 3 – The Competitive Firm's Short-Run Supply Curve
For the competitive firm in the short run
· its supply curve is its marginal cost (MC) curve above average variable cost (AVC)
· if product price (P) falls below AVC, the firm is better off shutting down
…
The competitive firm decides to shut down if total revenue (TR) is less than total variable costs (VC).
When divide by the number of units of product the firm's shutdown criterion can be stated as shut down if price < average variable cost (AVC)
…
When choosing to produce, a firm
· compares the price it receives for a unit
· to the AVC it must incur to produce the unit
If the price covers the AVC, since it has to pay fixed cost (FC) anyway, it will continue production.
If the price doesn't cover the AVC, the firm is better off stopping production altogether in the short run.
…
When P – AVC is +$1.00, that $1.00 can be used to pay off some of the FC.
When P – AVC is -$1.00, that -$1.00 is a loss along with FC.
A shut-down competitive firm will reopen and resume production when conditions change and price exceeds AVC.
…
For example, at an oil field
· fixed cost of pumping oil is $20 per barrel
· variable cost of pumping is $60 per barrel
If the price of oil drops from $85 to $65, it will continue to pump in the short run, because $5 of the $20 fixed cost is being paid off.
If the price of oil drops to $55, it will shut down because the price does not even cover variable costs.
… …
crude oil price
genyu kakaku
原油価格

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