The supply rule is a two-part set of theoretical guidelines for businesses in determining whether to produce and how much to produce. According to the supply rule, in the long run (when all RESOURCES are variable and subject to change), a firm should only produce quantity where marginal revenue (MR) is equal to or greater than marginal cost (MC). The choice of whether or not to produce is then determined by the second part of the supply rule: Produce the quantity where MR ³ MC if total revenue is greater than or equal to total cost (which is the same as price is greater than or equal to average total cost). In other words, a firm should produce if it is at least breaking even and produce nothing, in the long run, if it is not at least breaking even. In the short run—a time frame in which some resources are fixed (usually building and equipment)—the supply rule states that the firm should produce quantity where MR ³ MC if total revenue is greater than or equal to total variable costs (TR ³ TVC). If total revenue does not at least equal total variable costs (labor, materials, energy, etc.), the firm should produce nothing. In other words, if it is not at least covering the variable costs of production, it should not produce. Economists call this the SHUT-DOWN POINT. The basis of the supply rule is that no other level of output other than that quantity where MR ³ MC makes sense to produce. Marginal revenue is the extra revenue derived from producing and selling another unit of a good. Marginal cost is the extra cost of producing that unit of output. If the extra revenue exceeds the extra cost, keep producing. Either PROFITs will increase or losses will decrease. If the extra cost of another unit of output exceeds the extra revenue, the supply rule says do not produce. Profits will decrease or losses increase. While the supply rule makes sense in theory, it is difficult to use in practice. First, costs are difficult to allocate, especially in firms with multiple PRODUCTs. Second, it is even more difficult to estimate revenues—that is, to make projections about what consumers are willing and able to pay for the firm’s products—and in the time it takes to produce additional output, markets may change. The supply rule nevertheless provides logical guidelines for business decision making.