Loss minimization is one of three short-run production alternatives facing a firm. All three are displayed in the table presented here. The other two are profit maximization and shutdown.

• With profit maximization, price exceeds average total cost at the quantity that equates marginal revenue and marginal cost. In this case, the firm generates an economic profit.


• With shutdown, price is less than average variable cost at the quantity that equates marginal revenue and marginal cost. In this case, the firm incurs a smaller loss by producing no output and incurring a loss equal to total fixed cost.

Incurring a Loss

The key criterion for this decision is price relative to average variable cost.

• If price is greater than average variable cost, a firm receives sufficient revenue to pay ALL variable cost plus some fixed cost. As such, the economic loss is less than total fixed cost. A firm is better off producing the quantity that equates marginal revenue and marginal cost than producing no output, receiving no revenue, and incurring a loss equal to total fixed cost.


• If price is less than average variable cost, a firm does not receive enough revenue to pay variable cost let alone any part of fixed cost. As such, the economic loss of operating is greater than total fixed cost. A firm is better off shutting down production in the short run, producing zero output, and awaiting a higher price.