How does the shutdown decision affect markets and firms in a short-term time frame?
1 Answer
Shutdown decisions affect the market in view of those customers who are already patronizing as well as those who are against the firms goods and services. It also affects the firm in view of the management and the employees.
Explanation:
In view of the customers patronizing the products, they will now have the burden to find alternatives because the goods and services of a firm they are patronizing are no longer available in the market when such firm shuts down. This is a lost sale on the part of the firm (but for some reasons such as regulatory constraints, this firm has to shutdown).
For the customers who are against the goods and services of the firm, this is the first level of reason why the latter should decide to shutdown. The firm knowing that there will be no one patronizing their products anymore, will be better off to shutdown.
In view of the firm's employees, a shut down is at times equivalent to lay-off. Lay-ed-off employees now has the burden to find new jobs to have source of income. The firm, in turn, forgone the value of skill-set of the employees lay-ed-off.
The management, on one end, is concerned about the properties and equipment (P&E) invested in the shutdown operation. Especially that P&E are not yet fully depreciated. They are also concerned with the penalties (such as regulatory, market-related, and union).
