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Firms' Short-Run Decisions to Produce and Long-Run Decisions to Enter and Exit a Market

Definition

Firms make short-run decisions about whether or not to produce based on whether their total revenue covers their variable costs. In the long run, firms decide whether or not to enter or exit a market based on whether their total revenue covers both their variable and fixed costs.

Analogy

Think of short-run decisions like deciding whether or not to go out for dinner tonight based on how much money you have in your wallet right now. Long-run decisions are more like deciding if you can afford to rent an apartment based on your monthly income.

Related terms

Total Revenue (TR): TR is the overall income received from selling goods or services. It is calculated by multiplying price per unit by quantity sold.

Fixed Costs (FC): FC are expenses that do not vary with changes in output levels, such as rent or insurance. They must be paid regardless of whether the firm produces any output.

Market Entry and Exit: This term refers to the process by which firms decide to enter or exit a specific market based on factors such as profitability and competition.