A firm in a perfectly competitive market will always cease production in the short run if it experiences an economic loss, regardless of its average variable costs.

In a perfectly competitive market, firms aim to maximize their profits, but they can also face economic losses. If a firm experiences a loss, it will consider whether it can cover its variable costs, like wages and materials, in the short run. If the price it receives for its product is lower than its average variable costs, it means the firm is losing more money by continuing to produce than it would by shutting down. For example, if a bakery sells bread for $2 but its variable costs, like flour and labor, total $3 per loaf, it would lose $1 on every loaf sold. In this case, the bakery would choose to stop production temporarily to minimize its losses.