Grade Booster student workshops are back in cinemas for 2022. Learn more

Economics

Student Videos

Shut Down Price (Chain of Analysis)

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

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.

Shut Down Price (Chain of Analysis)

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.

Boston House,
214 High Street,
Boston Spa,
West Yorkshire,
LS23 6AD

Tel: +44 0844 800 0085

© 2022 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.