We've used the characteristics of many small firms and no product differentiation (homogeneous products) to explain how profit maximizing firms in perfect competition behave in the short run. In the short run firms will operate where MC = P, as long as P > AVC. In other words, firms in perfect competition will shut down in the short run if market price falls below average variable cost.
In the long run firms have time to change all decisions. Another way of saying
this is that in the long run all costs are variable. If a firm believes it will be suffering losses in the long run, it will exit the industry. If market price stays below average total cost in the long run, perfectly competitive firms will shut down.
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