Syndicate
At The Mercy of the Market Price
Given that the competitive companies have to accept the market price as such, their decision to continue operating in some way is completely out of their hands. There are only three possibilities here:
If the price is high enough, the company will be obtaining a benefit and will need to continue operating in order to continue getting that benefit. Graphically this occurs when the horizontal line of Marginal Revenue crosses the Marginal Cost curve in a point above the lowest part of the curve.
If the horizontal line Marginal Revenue crosses the Marginal Cost curve in appoint under the lowest part of the curve, the company is losing. The course of action to follow in such situations depends on how low the price is, and as a result, how big the loss is. There are two possibilities or conditions which are:
The short-term closure condition happens when the total revenue of a company are under their variable costs.
If this type of situation the company would be better off closing immediately and only losing their fixed costs. To continue producing in such a situation would result in a greater loss.
The long term closure condition happens when the total revenue of a company exceed the variable costs but are under their total costs.
In this type of situation, invariably the company losses money, but while it is still tied onto a series of commitments of fixed costs, it is more convenient for them to continue producing than to close immediately. If they produce, their total revenue overcomes their variable costs, in other words they can use the excess amount to pay at least one part of their fixed costs. On the other hand, if the company closes and does not produce anything, they will lose all the fixed costs and will be in a worse situation.
As you can see, the perfectly competitive company is in some ways, completely up to the mercy of the prices in the market. If the prices are high, a company can obtain benefits, but if the prices are low, the company can suffer losses. Even so, a decision of closing immediately or continue operating with a loss until the company is able to free themselves from fixed costs commitments depends entirely on the price. The perfectly competitive companies do not have any control on the prices.