Should the Firm Produce at All?
The firm always has the option of producing nothing (even while staying
in business). If it produces nothing, it will have an operating loss that is
equal to its fixed costs. If it decides to produce, it will add the variable
cost of production to its costs and the receipts from the sale of its product
to its revenue. Since it must pay its fixed costs in any event, it will be
worthwhile for the firm to produce as long as it can find some level of
output for which revenue exceeds variable cost. However, if its revenue is
less than its variable cost at every level of output, the firm will actually
lose more by producing than by not producing at all.
Table 9-1 shows an example of a firm that decides to minimize its losses
by producing no output when it faces a low market price. The table shows
the firm’s variable and fixed costs for each level of output. (If you were to
graph the TVC, TFC, and TC curves from this table, you would find that
they look like the curves we studied in Chapter 7 .) The table also shows
the firm’s total revenues and profits at every level of output. When the
market price is $2 per unit, the firm’s profits are negative at every level of
output—the firm’s revenues never cover its costs. At this low market price,
the firm’s revenues don’t even cover its variable costs and, in fact, the
negative profits (losses) only grow larger as output increases. In this
situation, the firm is better off to produce no output at all. In this case, the
firm is maximizing its profits by minimizing its losses. (The table also
presents a situation in which the price is $5 per unit; for reasons that we