shut down price

Shutdown Price

-The shutdown price is the minimum price at which a firm covers its variable costs in the short run.

--If the market price falls below the shutdown price, the firm stops production temporarily to minimize losses

Short-run decision

-If (AR) P ≥ AVC → produce to cover some fixed costs (minimize loss).

-If (AR) P < AVC → shutdown → produce nothing to avoid making larger losses.

formula

Shutdown Price=Minimum Average Variable Cost (AVC)

AVC = VC ÷ Q

Graphically where is the shutdown point

Graphically, the shutdown price is the point where the market price intersects the minimum of the AVC curve.

draw diagram

Short-run vs Long-run

-Short-run → shutdown occurs if price < AVC.

-Long-run → firm exits the industry if price < Average Total Cost (ATC)

Importance / Uses

-Firm Decision-making

--Determines whether to continue production -during low prices.

--Helps minimize losses in the short run.

-Market Analysis

--Shows the lowest sustainable price for producers.

--Helps understand supply responsiveness in the short run.

-Government Policy

--Useful in predicting effects of price floors, subsidies, or minimum prices.

Evaluation

-Depends on cost structure → firms with low variable costs can survive lower prices.

-Time horizon matters → short-run losses may be acceptable if prices are expected to rise.

-Market conditions → in perfectly competitive markets, shutdown decisions are clear; in monopoly or oligopoly, other strategic factors may influence the decision.