Shutdown point
Also called: Shut-down point · Topic: Theory of the Firm, Supply and Perfect Competition · NCERT: Class 12, Ch 4 "The Theory of the Firm under Perfect Competition"
Meaning
The shutdown point is the last price-output combination at which a firm still produces a positive output. Below this price, it produces nothing. In the short run, it is at minimum AVC (average variable cost), where the SMC curve cuts the AVC curve. In the long run, it is at minimum LRAC (long-run average cost). In the short run, a firm below this point loses more by producing than by shutting down. When it shuts down, it loses only its fixed cost.
Example
Suppose a firm's supply is zero when p < ₹10 and p − 10 when p ≥ ₹10. Its shut-down price is ₹10. At ₹9 it produces nothing and bears only its fixed cost (TFC). At ₹12 it produces 2 units, even if it makes a loss.
Don't confuse with
- Break-even point: this is at minimum AC, where the firm earns only normal profit. In the short run the shutdown point (min AVC) lies below the break-even point. In the long run, both points are at minimum LRAC.
Related concepts
- Supply
- Supply schedule
- Supply curve
- Short run supply curve of a firm
- Long run supply curve of a firm
- Break-even point