BEHAVIOURAL PRINCIPLE(PRINCIPLE 1)

BEHAVIOURAL PRINCIPLES 

Principle 1- A firm should not produce at all if its total variable costs are not met.

• It is a matter of common sense that a firm should produce only if it will do better by producing than by not producing. The firm always has the option of not producing at all.
•  If a firm’s total revenues are not enough to make good even the total variable costs, it is better for the firm to shut down. In other words, a competitive firm should shut down if the price is below AVC. 
• In that case, it will minimise loss because then its total cost will be equal to its fixed costs and it will have an operating loss equal to its fixed cost.
•  The sunk fixed cost is irrelevant to the shutdown decision because fixed costs are already incurred. This means that the minimum average variable cost is equal to the shut-down price, the price at which the firm ceases production in the short run. Shutting down is temporary and does not necessarily mean going out of business.
• If price (AR) is greater than minimum AVC, but less than minimum ATC, the firm covers its variable cost and some but not all of fixed cost. 
• If price is equal to minimum ATC, the firm covers both fixed and variable costs and earns normal profit or zero economic profit. 
• If price is greater than minimum ATC, the firm not only covers its full cost, but also earns positive economic profit or super normal profit.