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    Short-run and Long-run weak demand

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    When demand is weak, the firm will have the option of shutting down in the short run. But what condition must be met for it to make sense for the firm to shut down? If this condition was met, how would the firm benefit by shutting down?
    Furthermore, what if the weak demand continued in the long run? What do you change about the short run condition if the firm is acting in the long run? How would this option benefit the firm?

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    The firm should shut down when it can't be able to cover its variable costs in the short run. As long as it can cover the variable costs, it can continue its operations. Let's explain this more detailed. The firm has fixed and variable costs and its fixed costs are not opportunity costs in the short run. Thus they are not relevant to the decision to shut down. Even if the company shuts down, it has to pay its fixed costs. On the other hand the variable costs are avoidable and they are opportunity costs. So ...

    Solution Summary

    This solution helps with a problem involving managerial economics. Concepts covered include short-run and long-run demands.