loss minimization

Loss minimizationclick for a larger image
Fig. 113 Loss minimization.

loss minimization

the objective of the FIRM in the SHORT RUN when confronted with adverse market conditions that prevent PROFIT MAXIMIZATION. Profit maximization or loss minimization requires the firm to produce at that level of output where MARGINAL COST equals MARGINAL REVENUE.

For example, a firm under PERFECT COMPETITION would produce output OQ in Fig. 113. Adverse short-run conditions, however, may mean that at this level of output, price (OP) is insufficient to cover average total cost (QC) so that the firm makes losses (equal to area PCXY in Fig. 113). In the short run, the firm will continue to produce this level of output as long as price is sufficient to cover AVERAGE VARIABLE COST (OC1) and make some CONTRIBUTION (equal to area PC1ZY) towards FIXED COSTS, although in the LONG RUN a continuation of this situation of loss-making would force the firm to leave the market.