Final answer:
A competitive firm will short-run shutdown when the price falls below the average variable cost, at which point the firm fails to cover its variable costs and incurs larger losses by continuing to operate.
Step-by-step explanation:
A competitive firm will shut down its operations in the short run when the market price falls below its average variable cost. This scenario is known as the shutdown point. The shutdown point occurs at the intersection of the average variable cost curve and the marginal cost curve, which indicates the lowest price at which a firm can cover its variable costs. If a perfectly competitive firm faces a market price that is less than its minimum average variable cost, it should cease operations immediately because it would be unable to cover even its variable costs, and staying open would result in larger losses. Conversely, if the price is above the minimum average variable cost, the firm will cover all of its variable costs and some portion of its fixed costs, thereby minimizing losses compared to shutting down outright.