(5) The Shut Down Point for the Perfectly Competitive Firm
Shut Down Point
This indentifes the concept of a "Shut Down Point" for a Perfectly Competitive Firm. It provides the exception to the rule that the Perfectly Competitive Firm's Marginal Cost Curve is its Supply Curve. The Shut Down Point is shown to be where Average Revenue equals Average Variable Cost. At an Average Revenue (Price) below this level, the firm will lose less money by producing zero output than producing the amount where MR=MC. This is demostrated graphically.
Crane, Steven E., "(5) The Shut Down Point for the Perfectly Competitive Firm" (2011). Principles of Microeconomics. Paper 38.
Ability to explain why a firm might choose to produce zero output (shut down) in the short run rather than producing where MR=MC. Ability to identify the "Shut Down Point" on a graph and to demonstrate why this is a critical point for the firm in terms of its profit situation.
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