here's another cartoon that i found online
as we can see from the cartoon, the seller is going out of business, implying he is going to shut down his stall soon. the reason he gave is: i can't afford to absorb the overhead anymore! those paying attention during yesterday's econs lecture will know that overhead generally refers to fixed costs of production. the seller has reduced the price of lemonade from 25 cents to 10 cents. since demand curve has a negative gradient, quantity demanded will increase as price decreases. thus the main purpose of reducing prices is to attract more customers and increase revenue.
the fact that the seller is going to shut down his stall means that he is making subnormal profits. he has been absorbing the costs of production and continuing production will result in greater losses. it is important to note that whether a firm shut down or continue production depends on whether the total variable costs can be covered. the cartoon mentioned only the total fixed costs. generally, if a firm makes subnormal profits and total revenue is greater or equal to the total variable costs, the firm will continue production. the firm will only shut down when total revenue is less than total variable costs. thus, the fixed cost is not a main factor in determining whether a firm shuts down or not.
that's all!
mui suan :)
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