Shutdown Price Flashcards
Where does shutdown price occur?
AR = AVC
What does shutdown price consider/ mean/ show?
It considers whether firms which are making losses should leave in the short or long run
Which one (short run or long run) depends on which one yields the least losses
If AR > AVC what will the firm do?
If AR> AVC the firm won’t leave the market in the short run but the long run because the firm still has to pay fixed costs in the short run but not in the long run
It will pay fixed costs in the long run as they don’t vary with output
When AR>AVC will it contribute to paying fixed costs?
Yes it will, for example if AR is £10 but AVC is £7 every unit sold there is £3 left to contribute towards AFC, thus reducing the losses of total fixed costs
Why wouldn’t a firm with AR>AVC leave immediately/ what would happen if they did?
If they left immediately all variable costs would be eradicated (change with output) however they would also have zero revenue whilst still having to pay fixed costs
Additionally units produced will contribute to the payment of fixed costs
Why would a firm making AR<AVC leave immediately?
Because every additional unit will make a loss, so the firm reduces losses by only paying the fixed costs
What will be the average variable cost if the firm leaves immediately?
There will be no average variable cost, only fixed costs
Why would a firm earning AR = AVC leave immediately (short run)?
Because the loss would be the same whether they leave in the long run or short run
The loss is constant as more units are produced
It will leave due to opportunity cost
