Point at which the firm would be better off if it shut down than it will if it stays at business.
- If a price is above minimum AC (AVC) the firm will continue to produce.
- If a price is below minimum AC (AVC) the firm will shut down.
The decision to shut down operations in the short run.
AC - AVC = AFC
P - AC = per unit loss / profit.
When price is falling to a level that just allows the firm its minimum possible average cost of input the firm is at shut down point. At a market price of $35 per unit of that specific commodity P = AVC at the output for which price is equal marginal cost ( P = MC) , the firm produces 150 units and a loss per unit is equal to the distance DC, which also represent the average fixed cost. Therefore at that output ( P - AC ) and (AC - AVC) are both equal to the distance DC. The economic losses incurred by continuing to operate are equal to fixed costs. If the price were to fall below $35 per unit, the would close operations in the short run. Therefore the shut down point is at C, where the AVC curve is at minimum.
P - AC = per unit loss / profit.
When price is falling to a level that just allows the firm its minimum possible average cost of input the firm is at shut down point. At a market price of $35 per unit of that specific commodity P = AVC at the output for which price is equal marginal cost ( P = MC) , the firm produces 150 units and a loss per unit is equal to the distance DC, which also represent the average fixed cost. Therefore at that output ( P - AC ) and (AC - AVC) are both equal to the distance DC. The economic losses incurred by continuing to operate are equal to fixed costs. If the price were to fall below $35 per unit, the would close operations in the short run. Therefore the shut down point is at C, where the AVC curve is at minimum.
Shutting down.
At the output corresponding to the point at which MR = MC, operative losses represented by area ABCD exceed fixed cost, represented by area ABFG. Because the price is less than minimum AVC (Ю P< AVC min). This is because the vertical distance between the firms demand curve and its average cost curve would exceed the vertical distance between AC and AVC. In this case the firm would be compelled to shut down operations immediately.
In summary, the conditions to remain in operation in the short run, while incurring losses are: TR > VC
PQ >AVC (Q)
In summary, the conditions to remain in operation in the short run, while incurring losses are: TR > VC
PQ >AVC (Q)
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