Eco 365 Week 2 Dq

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  • Topic: Costs, Variable cost, Management accounting
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  • Published : December 23, 2012
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For a firm to shut down in the short run, the average variable cost can avoid paying by shutting down exceed the price it would get for selling the good (Colander, pg. 328). At a certain point to continue producing and selling goods would get higher than the fixed costs of not producing the goods or service. As the text mentions, automakers will continue to produce at a loss because the labor is a fixed cost due to union agreements. These agreements state that the workers will get paid if they are working or not working. In this instance the automaker cannot afford to shut down even for the short run. In recent times, several automakers have decided to shut down for the short run due to manufacturing defects to their products. Toyota has experienced this type of shut down several times in the last few years. The decision to have a temporary shutdown would have a less of loss compared to the repair of the products that have already been sold. Toyota eventually resumed production of these vehicles once the issue was discovered and corrected to the products. In the short-run, which is usually defined as when capital is fixed, fixed costs don't enter into the decision of whether to operate or not. Only variable costs matter. In the long-run, all costs are variable. Under what conditions will a firm shut down operations in the short run? Identify an example you are familiar with, or have identified through research, of a business that has temporarily shut down operations in the short run. What led to this decision? Did the firm resume operations at a later date?

Conditions where a firm will shut down operation in the short run is decided when the firm can maximize it's profits. According to "Short - Run Supply" (2012), "A firm maximizes its profits by choosing to supply the level of output where its marginal revenue equals its marginal cost. When marginal revenue exceeds marginal cost, the firm can earn greater profits by increasing its output". For example, in a fine dining restaurant, the lowest day of sales is either the 4th of July, or Superbowl Sunday. When a fine dining restaurant has such a high cost of operation with labor, it is more beneficial to shut down short term operations when they cannot maximize profits. The firm (restaurnt) would open the following day. Another example would be a tax firm, some will close operations in off months and maxamize their time during peak season (February - April) when the demand is on income taxes. "The firm has fewer options in a short run decision, in which the firm is constrained in regard to what production decisions it can make (Colandar, 2010)". Reference:

Economics, 8e; Colander, David C.; 2010, McGraw-Hill Company A firm will base part or all of their decision to temporarily shut down operations based on the point that the price for their product equals the average variable costs (AVC) to produce the good, this is known as the shutdown point (Colander, p. 328, 2010). This decision is made because the business will be breaking even with the costs of producing their products, and none of their fixed costs will be covered by revenue. As long as the market price for their good is above the AVC, they are at least making money to reduce how much they are losing due to their fixed costs. According to Chow (2008), ImaSight made the decision to temporarily halt operations for their Liponex division in order to build capital. This decision was based on a financial decision to assure they had enough capital to assure they can increase financial stability before trying to grow that division. The article did not specify the resolution to the shutdown, but it alluded to a re-opening of full operations being planned once enough capital had been acquired.

Colander, D. C. (2010). Economics (8th ed.). Retrieved from The University of Phoenix eBook Collection database. Chow, K. (2008, November). ImaSight temporarily shuts down Liponex . Ottawa Business Journal, 14(8), 1. Business...
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