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Shut Down Price (Chain of Analysis)
- Level:
- AS, A-Level, IB
- Board:
- AQA, Edexcel, OCR, IB, Eduqas, WJEC
Last updated 5 Oct 2020
The shut down price are the conditions and price where a firm will decide to stop producing. It occurs where AR is less than AVC.
In the short run, a business will continue to supply products as long as their revenues at least cover variable costs. Revenue = AR x Q.
Variable costs are costs that vary directly with output such as raw materials, component parts and employees paid an hourly wage.
Providing that price per unit (AR) > average variable cost (AVC), then a contributionis being made to cover some fixed (overhead) cost
As a result the firm would be better off continuing production if we assume that fixed costs are lost if a shut-down decision is made.
But, if there is a fall in demand and price drops below AVC, then a firm might decide to shut-down production to minimise their losses.
This is because not enough revenue is being generated and total losses suffered would be higher if production continued.
Cineworld confirms all cinemas in UK and US will temporarily close – business live https://t.co/vSGWKGz5zo
— Guardian Business (@BusinessDesk) October 5, 2020
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