Glossary term
Shut-Down Point: Meaning and Definition
Reviewed and approved by Dr. Anamika ShrivastavaPublished Last updated
The shut-down point is the price at which a competitive firm in the short run just covers its average variable cost, the lowest point of that curve. If the price falls below it, the firm loses less by closing than by producing, since it avoids variable costs but still pays fixed costs.
In more detail
The rule rests on comparing revenue with the costs that can be avoided. As long as revenue covers all variable costs, any excess goes towards fixed costs, so producing is better than closing. In the long run, all costs are variable, so a firm stays only if the price covers average cost.
Example
If the minimum average variable cost is ₹12, a firm continues to produce at a price of ₹14 even at a loss, but shuts down if the price drops to ₹10.
Key points
- Price below minimum AVC: stop production.
- Fixed costs must be paid either way in the short run.
- Above it, the firm supplies where price equals marginal cost.
Common mistake
Using average total cost instead of average variable cost in the short run.
Related terms
Marginal costPerfect competition
Where it is explained
This term is explained in Class 12 Microeconomics Chapter 4: The Theory of the Firm under Perfect Competition.