The document discusses shut down price and normal profit price for a firm operating in a perfectly competitive market. It shows these prices on a diagram with marginal cost, average cost and average variable cost curves. The shut down price is where price equals minimum average variable cost, as below this price the firm would face losses by continuing operations. The normal profit price is where price equals average cost, allowing the firm to cover total costs and earn normal profits in the short run. The shut down price is a short run concept that determines whether a firm should continue or cease production temporarily.

1. A2 Micro
Shut Down Price
Tutor2u, Summer 2013

2. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
Remember that MC
always cuts AC and AVC
at the minimum points

3. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
AR
MR
Q1
P1

4. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
AR
MR
Q1
P1
C1

5. Cost ,
Price
Quantity of output
Plant close-downs and market exit
MC
AC
AVC
AR
MR
Q1
P1
C1
Business is making a loss
here because P < AC
i.e. sub-normal profit

6. Cost ,
Price
Quantity of output
Showing the shut down price and the normal profit price on a diagram –
assume this firm is operating in a perfectly competitive market
MC
AC
AVC

7. Cost ,
Price
Quantity of output
Showing the shut down price and the normal profit price on a diagram –
assume this firm is operating in a perfectly competitive market
MC
AC
AVCP1
P1: Price = average cost,
normal profits made

8. Cost ,
Price
Quantity of output
Showing the shut down price and the normal profit price on a diagram –
assume this firm is operating in a perfectly competitive market
MC
AC
AVC
P2
P1
P1: Price = average cost,
normal profits made
P2: Price = average
variable cost P=Min AVC is the shut down
price for a competitive firm
in short run
The Shut-Down price is
mainly a short run
concept

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