Answer to Question #130994 in Microeconomics for ismail lodin

Question

By definition, cost is zero if a firm does not hire any input. Hence cost-minimization essentially means shutting down the operation of the firm.” Do you agree with the statement? Justify you answer by giving an explanation from micro economic theory.

Answer 1

When an enterprise is faced with the problem of minimizing losses, it must compare total income with the value of total variable costs. As for the full fixed costs, the enterprise will bear them regardless of whether it will work or not, unless, of course, it is not about the liquidation of the enterprise, but about the temporary suspension of its production activities.Consequently, the enterprise can operate as long as the gross income exceeds the total variable costs. In this case, he gets the opportunity to cover some fixed costs due to this excess, which reduces the total cost of the latter.

If the market price falls so low that it cannot cover more than just average costs, production becomes impractical even in the short term. In this case, the company's closing point will be the lowest point on the average variable cost curve.

A company can minimize costs by conducting production in the event that a simple economic calculation shows that it should close due to losses, since part of the production costs is covered in whole or in part by fixed costs. The same idea can be expressed as follows: the company's profit is maximized for such a volume of production, when the gross income exceeds the maximum gross costs.

The company minimizes losses in the production of such a volume of products, at which the gross costs at least exceed the gross income. However, if it is not possible to ensure that gross income exceeds variable costs, the company is advised to minimize losses in the short term by closing production.

If a company temporarily closes and produces nothing in the short term, then its revenues, such as variable costs, will be zero, but it can only avoid fixed costs by completely stopping operations.