If P > AVC, continue to produce
The decision rules for a firm to continue operation or shut down when it is currently operating at a loss can be given as follows:
Scenario 1: If P > AVC, continue to produce.
Scenario 2: If P < AVC, shut down.
Under scenario 1, it is advisable for the firm to continue operation. This is because, at a price (P) greater than an average variable cost (AVC), the firm will be able to fully cover the variable cost of production and it will also be able to cover a part of the fixed cost but not fully. Therefore, the firm will be minimizing loss by continuing operation.
Under scenario 2, it is advisable for the to shut down operation. This is because, at a price (P) lower than the average variable cost (AVC), the firm is unable to fully cover the variable cost of operation not talk of saving a part of the fixed. Therefore, the firm will be minimizing loss by shutting down operation.
Therefore, scenario 1 is an example of when a firm might face the decision to continue to produce even at a loss provided the price is more than the average variable cost.
The opportunity cost is the cost of the best rejected opportunity.
Let's suppose we are offer two jobs positions:
One is for 10,000 dollars per year
while another is for 100,000
The first job has an opportunity cost of 100,000.
Therefore while the goverment, friends and relatives thinks we earning 10,000 (explicit revenue) thus, doing tax income, asking for favor and loans on your "gains"
We are in fact lossing 90,000 dollars per year as we could be in the oother position earning a lot more.
The second job has an opportunity cost of 10,00 which the job we aren't taking for doing the current job.
In this case we are facing an implicit cost of 10,000.
From an economic point of view our gains are 90,000
While the explicit are 100,000 as it is not considering the opportunity cost of the factor.
This is possible when such company operates in an unstable economy
An unstable economy where inflation and deflation is always the case gives room for a company to keep producing after taking into cognizance the fact sometime inflation will automatically make up for the difference in price. As for the variable coat, this is mostly associated with the cost of raw materials for production. This of course is also where the cost that results in loss arises from. The fixed cost are inevitable expenses that contributes to the overall cost in production.
Let's say that that Daniel has work on the same day his friends want to see a movie.If Daniel misses out on the movie the oppertunity cost will be missing out on the movie to go work.If Daniel skips work, the opportunity cost will be the wages lost from work.
what are the statements.?
answer; preominantly inattentive;