Question

The short run supply curve by a price-taking firm is the positively-sloped portion of the short-run marginal cost curve because the fixed cost of the firm is going to remain equal even if there is no production, which means that the best decision is to not produce anything if the best positive output gives you a loss greater than the fixed cost, and otherwise to produce y. Thus, the best action to take is to produce nothing if the price is less than the minimum of the firms AVC.  How do you think of this idea?

Answer 1

The point of intersection of average variable cost and marginal cost curve shows shutdown point price less than minimum average variable cost shows it doesn't able to cover average variable cost from revenue so the firm must shut down if price is below AVC and to produce nothing as revenue is not sufficient even to cover AVC . If losses are greater than fixed cost then firm should not produce more and should shut down and pay its fixed cost as fixed cost is there even if no production is going like rent, equipment lease.

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