Why do some perfectly competitive, loss-making firms shutdown and others don't? Question:

Why do perfectly competitive, loss-making firms that have (AC>AVC>AR) shutdown but

Firms that have (AC>AR>AVC) not shutdown?

-Both of these types of firms are making a loss. How is it significant that the latter type's AVC is less than AR ? How does that affect whether it shuts down ?**

These two graphs are for the two types of firms in perfectly competitive markets:


Loss-making firms where their AC > AR &amp; AVC > AR that shutdown

Loss-making firms where their AC > AR &amp; AVC &lt; AR that don't shutdown.
$AVC&lt;AR$ means, without considering fixed cost, the firm is making a profit of $AR-AVC&gt;0$ per unit of output. Compare the two options: keep producing vs  shutdown: 


Keep producing: $\text{Avg Profit}=\underbrace{AR-AVC}_{&gt;0}-AFC$
Shutdown: $\text{Avg Profit}=0-AFC$


Since $AVC&lt;AR$, staying in production is better since the revenues can be used to offset part of the fixed costs already incurred.



$AVC&gt;AR$ means, without considering fixed costs, the firm is making a loss of $AR-AVC&lt;0$ per unit of output. Compare the two options: keep producing vs shutdown: 


Keep producing: $\text{Avg Profit}=\underbrace{AR-AVC}_{&lt;0}-AFC$
Shutdown: $\text{Avg Profit}=0-AFC$


Since $AVC&gt;AR$, shutting down leads to a smaller loss than staying in production.