Question

Should a firm making a loss in the short-run always leave the market? Why or why not? What about in the long-run?

Answer 1

There are two types of cost. One is variable cost and other is fixed cost. Producer losses when total revenue is less than total cost. If in short run price is more than Average variable cost and less than Average total cost, firm will suffer from loss and continue production because they are able to cover some part of their fixed cost and all of variable cost which will induce producers to still operate in the market. If in long run, they are still earning loss, they will shut down because there is no fixed cost in long run and price would be less than average variable / total cost.