How to Find the Shutdown Point
The shutdown point is the price equal to minimum average variable cost; below that price a firm stops producing in the short run.
The Shutdown Point formula
Calculator
Enter total variable cost, output and the market price to get minimum AVC and the short-run shutdown verdict.
Costs that move with output: wages, materials, power. Fixed costs stay out of this.
Use the output where MC crosses AVC, which is the bottom of the AVC curve.
What the firm can get per unit right now.
Any price below $6 fails to cover variable cost per unit, so the firm stops producing in the short run.
- Decision at this price
- Shut down
- Margin over variable cost per unit
- −$1
- Revenue minus variable cost
- −$30
- Total revenue
- $150
At $5 every unit loses $1 on variable cost alone, so producing makes the loss bigger than fixed cost by itself.
Price minus AVC. Negative means each unit produced deepens the loss.
What is left to put toward fixed costs. Fixed costs are sunk, so they never enter this decision.
Price multiplied by output, for comparison against total variable cost.
How to calculate Shutdown Point, step by step
- 1Calculate average variable cost. Divide total variable cost by quantity at each output level: AVC = TVC ÷ Q.
- 2Locate minimum AVC. The lowest AVC value is the output where the marginal cost curve crosses the AVC curve from below.
- 3Compare price to minimum AVC. Set the market price the firm faces next to that minimum AVC figure.
- 4Apply the rule. Keep producing if P is at or above minimum AVC; shut down if P is below it, because revenue would not even cover variable cost.
Worked example: Shutdown Point
A firm's total variable cost is $180 at 30 units, so AVC = 180 ÷ 30 = $6, and MC equals AVC at $6 there, making $6 the minimum AVC. At a market price of $5 the firm shuts down, since each unit loses $1 on variable cost alone; at $7 it keeps producing even though fixed costs may leave it with a loss.
Shutdown Point questions
What is the difference between the shutdown point and the break-even point?
The shutdown point is minimum AVC and the break-even point is minimum ATC; between the two a firm loses money but still covers its variable costs, so it keeps operating.
Why do fixed costs not affect the shutdown decision?
Fixed costs are paid whether or not the firm produces, so they are sunk in the short run and drop out of the comparison between price and variable cost per unit.
What happens if price exactly equals minimum AVC?
The firm is indifferent, because revenue covers variable cost exactly and the loss equals total fixed cost whether it produces or shuts down.
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