Economics » Market Structures » Break-Even/Shut-Down Analysis of a Perfectly Competitive Firm

Short-Run Shut-Down Decision of a Perfectly Competitive Firm

If a firm shuts down operation in the short-run, it will incur a loss equal to its Total Fixed Cost (TFC) because no variable cost will be incurred. Therefore, the perfectly competitive firm will shut down and produce nothing at any price below which the firm’s loss will exceed its Total Variable Cost (TVC) to include a fraction of or all of the TFC.

Fig. 10.7: The short-run shut-down point for a perfectly competitive firm

In Figure 10.7, the firm’s short-run supply curve is the Short-run Marginal Cost (SMC) curve above point A, the shut-down point corresponding to the output level (Q1) and price (P1) below which the firm cannot cover Average Variable Costs (SAVC) in the short-run.

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