In the short-run, a firm should continue operating as long as its revenues are able to cover its total variable costs. This is known as the contributing margin or the break-even point. As long as the firm generates revenue above its variable costs, it is able to cover some of its fixed costs and remain in business temporarily.
In the long-run, the firm should continue operating only if its revenues cover both its variable costs and fixed costs. The firm needs to generate sufficient revenue to cover its total costs of production, including fixed overhead expenses, in order to remain viable in the long term.
Some specific conditions for continuing in the:
Short-run:
• Revenue exceeds total variable costs. The firm contributes something towards fixed costs.
• The firm does not suffer losses that would cause it to go bankrupt in the short term.
• The firm has access to credit or investor funding to cover losses temporarily.
Long-run:
• Revenue equals or exceeds total costs (fixed plus variable costs).
• The firm generates enough profits to reinvest in the business and grow.
• The firm's products or services have sufficient demand to justify ongoing operations.
• The firm is able to adapt and improve its production process for long-term sustainability.
Hope this explanation helps! Let me know if you have any other questions.
Answers & Comments
Answer:
In the short-run, a firm should continue operating as long as its revenues are able to cover its total variable costs. This is known as the contributing margin or the break-even point. As long as the firm generates revenue above its variable costs, it is able to cover some of its fixed costs and remain in business temporarily.
In the long-run, the firm should continue operating only if its revenues cover both its variable costs and fixed costs. The firm needs to generate sufficient revenue to cover its total costs of production, including fixed overhead expenses, in order to remain viable in the long term.
Some specific conditions for continuing in the:
Short-run:
• Revenue exceeds total variable costs. The firm contributes something towards fixed costs.
• The firm does not suffer losses that would cause it to go bankrupt in the short term.
• The firm has access to credit or investor funding to cover losses temporarily.
Long-run:
• Revenue equals or exceeds total costs (fixed plus variable costs).
• The firm generates enough profits to reinvest in the business and grow.
• The firm's products or services have sufficient demand to justify ongoing operations.
• The firm is able to adapt and improve its production process for long-term sustainability.
Hope this explanation helps! Let me know if you have any other questions.