Figure 8.5 Deciding Whether to Operate or Shut Down in the Short Run

At market price P, the firm earns a negative economic profit equal to the area of the rectangle with length Q* and height (P – ATC*). Because price is above the firm’s average variable cost AVC* at the profit-maximizing quantity Q*, however, the firm will continue to operate in the short run. That is because in doing so, the firm can at least cover its variable cost.