Step 7. For the output level where marginal revenue is equal to marginal cost, check if the market price is

greater than the average variable cost of producing that output level.

•

•

If P > AVC but P < ATC, then the firm continues to produce in the short-run, making economic losses.

If P < AVC, then the firm stops producing and only incurs its fixed costs.

In this example, the price of $28 is greater than the AVC ($16.40) of producing 5 units of output, so the firm

continues producing.
204 8 • Perfect Competition

8.3 Entry and Exit Decisions in the Long Run

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Explain how entry and exit lead to zero profits in the long run

• Discuss the long-run adjustment process

It is impossible to precisely define the line between the short run and the long run with a stopwatch, or even

with a calendar. It varies according to the specific business. Therefore, the distinction between the short run
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