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Revenues, Costs and Profits

The short-run and long-run shut-down points

  • 3 things to know
  • Papers 1 and 3

Overview

Recall questions on where each point lies, why a loss-making firm may continue in the short run, and when it will leave the industry.

What you need to know

Answer each one before you reveal it.

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Key term

At what point does the short-run shut-down occur in terms of price and costs?

Key term

What happens to a firm if price persistently remains below average total cost?

Key term

Explain the relationship between the minimum AC and the long-run shut-down decision.

Questions from this subtopic

Each one with the model answer underneath.

  1. 1

    At what point does the short-run shut-down occur in terms of price and costs?

    Model answer

    The short-run shut-down point occurs where price (AR) falls below average variable cost (AVC).

  2. 2

    Why does a loss-making firm continue to produce in the short run as long as price covers average variable cost?

    Model answer

    Because the firm can still make a contribution towards its fixed costs, which must be paid regardless of whether production continues.

  3. 3

    Where is the short-run shut-down point located on a cost curve diagram?

    Model answer

    At the minimum point of the average variable cost (AVC) curve.

  4. 4

    At what point does a firm decide to shut down in the long run?

    Model answer

    When price (AR) falls below average total cost (AC), meaning the firm cannot cover all its costs including normal profit.

  5. 5

    Why does a firm shut down in the long run if AR < AC?

    Model answer

    Because the firm is making losses and cannot cover all its costs; in the long run, all factors are variable so there is no reason to continue operating at a loss.

  6. 6

    What happens to a firm if price persistently remains below average total cost?

    Model answer

    The firm will exit the industry in the long run as it is making economic losses and cannot sustain operations.

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