Competitive Firm Selling, Essay Example

As a manager of perfectly competitive firm selling shoes, the fact that the business is making a loss because total revenue is less than total cost is not an adequate reason to shut down the business. The shoe selling business has a fixed cost of US $ 80,000 per month and variable cost of US $ 120,000 per month.  The company sells a total of 6,000 shoes per month at a price of US $ 30 per pair of shoes

The total cost, TC of the company is therefore US $ 80,000 + $ 120,000 = US $ 200,000. The total revenue for the company = 6000* US $ 30 = US $ 180, 000. From this, it can be argued that the shoe selling business is running at a loss since total revenue, TR, is less than total cost, TC. The business is making a loss of US $ 200,000- US $ 180,000 = US $ 20,000. The loss of the shoe selling business is therefore 20, 000. Again the price of the shoes is less than the average variable cost, since the price of the shoes is US $ 30 and the average variable cost, AVC, is 120,000/6,000 = US $ 20.

From the calculations, it is clear that the shoe selling company is still able to cover its fixed cost hence should continue with its operation. The company can be able to reduce some of its fixed costs such as its employees and become profitable. The loss that the business is making should not therefore be used as a condition to shut down the business.  This is because despite the business making a loss, its total revenue is in excess of total variable cost.  The fixed cost of a company is important for the operation of the business hence when the company is still able to meet its fixed cost it should continue with its operation. The loss making of the business is a short term phenomenon and can be changed through reducing some of the fixed cost so as to enable it to become profitable in the long run.

Shouting down the business should only occur when price is less than average variable cost and also when total revenue is less than total variable cost while on the other hand continuing with the business should happen when price is greater than the average variable cost and total revenue is greater than total variable cost. The shoe selling business should therefore continue with its operation since price is greater than average variable cost and the total revenue is greater than total variable cost.