Following the rules discussed in the previous section. Here is an example.

Firms fixed cost is $100, its min AVC is $55.

If market price is 50 which is less than min AVC, the firm would loss $5 more by producing each unit. If the firm produces one unit, its total loss would be $5 plus $100 fixed cost. If the firm decides to shut down, its loss would be only $100 as the firm does not need to pay for the variable cost. Shut down would be the loss minimization strategy.

If the market price is 60, the firm would lose $5 less by producing each unit. If the firm produces one unit, its total cost would be fixed cost less $5, which is $95. The firm is better off by producing, not shutting down. When the market price is higher than the minimum AVC, MR and MC should be compared to find out the optimal level of output.

Long Run Analysis

Obviously, the firm cannot be in loss for long. Three assumptions are made for the long run analysis:

1. Entry and exit are the only long run adjustments.

2. Firms in the industry have identical cost curves.

3. The industry is in constant return to scale.

In long run, if economic profits are earned, firms enter the industry, which increases the market supply, causing the product price to go down. Until zero economic profits are earned, then the supply will be steady. If losses are incurred in the short run, firms will leave the industry which decreases the market supply, causing the product price to rise until losses disappear. This model is one of zero economic profits in long run. The long run equilibrium is achieved, the product price will be exactly equal to, and production will occur at, each firm’s point of minimum average total cost.

Efficiency:

1. Productive efficiency: occurs where P= min ATC. Perfect competitive firms will achieve productive efficiency as firms must use the least-cost technology or they won't survive.

2. Allocative efficiency: occurs where P = MC. Price represent the benefit that society gets from additional units of a product, MC represents the cost to society of other goods given up to produce this product. Dynamic adjustments will occur in this market structure when changes in demand, supply or technology occurs. Perfect competitive firms will achieve this efficiency. Since no explicit orders are given to the industry, "the Invisible Hand" works in this system.

Even though both efficiencies are achieved in this system, the consumers are facing standard products, making shopping to be no fun at all. On the other hand, the consumers will receive the highest consumer surplus in this structure as the long run market price will be at the min ATC. Producers will receive the lowest producer surplus as consumers can easily find substitutes.