Economics Short Run Vs Long Run Costs Questions
In the short run, average cost plays a crucial role in a firm's decision-making process. It helps the firm determine whether it should continue producing or shut down temporarily. If the average cost is higher than the price of the product, the firm will incur losses by producing and should consider shutting down. However, if the average cost is lower than the price, the firm will continue producing as it can cover its variable costs and make some contribution towards fixed costs. Therefore, average cost guides the firm's decision on whether to produce or shut down in the short run.