Figure 9-3 Shut-Down Price for a Competitive Firm
shut-down price Such a price is shown in Figure 9-3 and is equal to
the lowest point on the firm’s AVC curve. At a price of the firm can just
cover its variable cost by producing units. For any price below there
is no level of output at which variable costs can be covered, and thus the
firm will choose to produce nothing. The price is therefore the firm’s
shut-down price. At any price above there are many levels of output
that cover average variable costs (but for each price above there is only
a single level of output that maximizes the firm’s profit, which we will see
shortly).
When the market price is less than the minimum average variable cost,
the competitive firm will choose to produce no output. If the price is
exactly the firm can just cover its variable costs by producing units
of output (and so is indifferent between producing units or nothing).
At any price below the firm is better off shutting down and producing
no output. At any price above there are many output levels that cover
variable costs. For example, at price any level of output between
and will cover variable costs.
p 0 ,
Q 0 p 0 ,p 0
p 0 ,
p 0p 0 , Q 0
Q 0
p 0 ,
p 0 ,
p 1 ,
Q′ 1