SR and LR shut down points Flashcards
Where is the shutdown point ?
This is where AR=AVC
(SR) What happens when AR is more than AVC for profit loss making firms ?
They should stay in the market as even if they have huge fixed costs, their revenue gained will cover up those costs in the long run as they are making more money each sale of the good and will make profit.
(SR) What happens when AR is below AVC for profit loss making firms ?
The company shit leave the market as the firm is no longer making more revenue than their average variable costs and will be making a loss for every unit sold. They should leave to avoid losses.
Where is the LR shutdown point ?
This is when Ar is equal to ATC.
How is AR = ATC for the LR shutdown point ?
This is because AVC is equal to ATC as there are no fixed costs in the long run.
What happens when AR is more than ATC ?
They should stay in the market as for each unit they are making more for selling than producing the good. They make profit.
What happens when AR is less than ATC ?
They should leave the market as they will be losing money on each sale as it costs more to produce one good than to sell it.
What are the evaluation points for the shut down prices ?
Even if AR is lower than AVC, firms may still contniue to produce as they do not want to lose out on long term customers. Firms can get acess to credit loans or high svings. It may try to cut its costs
