Shut down price
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The document discusses shut down price and normal profit price for a firm operating in a perfectly competitive market. It shows these prices on a diagram with marginal cost, average cost and average variable cost curves. The shut down price is where price equals minimum average variable cost, as below this price the firm would face losses by continuing operations. The normal profit price is where price equals average cost, allowing the firm to cover total costs and earn normal profits in the short run. The shut down price is a short run concept that determines whether a firm should continue or cease production temporarily.
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Shut down price
- 1. A2 Micro Shut Down Price Tutor2u, Summer 2013
- 2. Cost , Price Quantity of output Plant close-downs and market exit MC AC AVC Remember that MC always cuts AC and AVC at the minimum points
- 3. Cost , Price Quantity of output Plant close-downs and market exit MC AC AVC AR MR Q1 P1
- 4. Cost , Price Quantity of output Plant close-downs and market exit MC AC AVC AR MR Q1 P1 C1
- 5. Cost , Price Quantity of output Plant close-downs and market exit MC AC AVC AR MR Q1 P1 C1 Business is making a loss here because P < AC i.e. sub-normal profit
- 6. Cost , Price Quantity of output Showing the shut down price and the normal profit price on a diagram – assume this firm is operating in a perfectly competitive market MC AC AVC
- 7. Cost , Price Quantity of output Showing the shut down price and the normal profit price on a diagram – assume this firm is operating in a perfectly competitive market MC AC AVCP1 P1: Price = average cost, normal profits made
- 8. Cost , Price Quantity of output Showing the shut down price and the normal profit price on a diagram – assume this firm is operating in a perfectly competitive market MC AC AVC P2 P1 P1: Price = average cost, normal profits made P2: Price = average variable cost P=Min AVC is the shut down price for a competitive firm in short run The Shut-Down price is mainly a short run concept
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