If market price is below the ATC curve, firms will be incurring losses (shown as the shaded area). This industry is now worse than the average investment. Therefore, firms will have an incentive to exit.

   Clearly not all firms can exit, some will remain or the industry would disappear. The most likely explanation for why some leave and others don't is that firm owners differ in terms of their optimism about the industry.

Copyright © 1995-2004 OnLineTexts.com, Inc. - All Rights Reserved