Question

S In the context of a perfectly competitive industry, clearly explain the difference between "shutdown" and "exit". Explain whether these two phenomena take place in the short-run or long-run and also describe the price-cost relationship (i.e. connection between market price and AVC, AFC, and ATC) necessary for "shutdown" and for "exit" Minn

Answer 1

In case of a perfectly competitive industry, shutdown occurs in the short run and exit occurs in the long run. Shutdown means producing nothing but a remaining in the industry and exit means producing nothing and leaving the industry. for shutdown it is necessary that the market price is less than the average variable cost. For exit it is necessary that price is less than average total cost. this happens because some portion or entire portion of the fixed cost can be avoided in the long run by exiting the market.