Final answer:
When a firm's price is less than its ATC, it means the firm is experiencing economic losses in the short run. The firm will continue producing if the price is above AVC, as it covers variable costs and helps minimize losses. However, if the price is below AVC, the firm will shut down to avoid further losses.
Step-by-step explanation:
In the context of economics, when a firm's price is less than its average total cost (ATC), it indicates that the firm is incurring losses in the short run. Specifically, if Price < ATC, the firm's revenues are not sufficient to cover all its costs, including both variable and fixed costs, thus leading to economic losses. Researching short-run outcomes for perfectly competitive firms helps in understanding why, if P > AVC but P < ATC, a firm will continue to produce; because it covers its variable costs, and by producing, it minimizes losses compared to shutting down immediately.
Yet, if the price falls below even the minimum average variable cost (AVC), the firm will shut down operations in the short run, as it would not make sense to produce at a price that doesn't cover the variable costs of production. Decisions regarding production in such cases depend on comparing the price with the AVC and ATC curves within the economic model of perfect competition.