Final answer:
The activity cost of committed resources becomes relevant when there's a permanent decrease in demand and activity capacity reduces. Industry adjustments are defined by constant, increasing, or decreasing cost industries, reflecting how costs react to demand changes. Price falling below AVC may lead a firm to shut down to minimize losses.
Step-by-step explanation:
The activity cost of committed resources becomes relevant for a decision when there is a permanent decrease in demand and the activity capacity reduces. This situation presents a scenario where the costs associated with keeping the resources are no longer justified by the revenue generated due to lower demand. When activity capacity remains unchanged or increases, the committed resources can still potentially be utilized to meet future demand.
In the context of industry adjustments, we learn that an industry can be categorized as (1) constant cost, (2) increasing cost, or (3) decreasing cost industry. These categories highlight how the costs of production respond to changes in demand. In a constant cost industry, the costs remain unchanged with demand variations; in an increasing cost industry, costs rise as demand increases due to scarcities and wage increases; in a decreasing cost industry, advancements such as new technologies or economies of scale allow supply to easily increase in response to demand hikes, leading to reduced costs per unit produced.
If a firm's price falls below its average variable cost (AVC), it may incur a smaller loss by shutting down and merely suffering its fixed costs rather than operating at a loss that exceeds both fixed and some variable costs.