Shutdown point
You are currently viewing a sample of the Cram Kit. Click here to unlock everything.
Shutdown point is where P < AVC.
Translation: Why would you produce another unit if you couldn't even cover the unit cost?
Find MR = MC to derive price of $30.
Vertically from that point, is price below AVC?
That means the firm is losing more than it would if it paused operations.
- Fixed Loss: Inevitable, exists no matter output.
- Operating Loss: Avoidable if you temporarily shut down.
If in the short-run & P < AVC... they'll temporarily shutdown. Better to wait for market conditions to improve than incur operating losses.
If in the long-run & P < LRATC... they'll exit the market permanently. Over the long haul, the business will simply lose money.
When given a perfectly competitive firm with cost curves and MR/MC...
Can you identify the profit maximizing point?
Can you extract the price & AVC at the profit maximizing point?
Can you determine if the firm should shutdown vs. continue operating?
Can you distinguish between temporary shutdown vs. permanent exit?