7. Breakeven Analysis and Shutdown Decision
e. determine and describe breakeven and shutdown points of production;
The minimum Average Total Cost (ATC) is often referred to as __?
What is the shutdown point?
The shutdown point is the output and price at which the firm just covers its total variable cost. At the shutdown point, the firm is indifferent between producing and shutting down temporarily. It incurs a loss equal to total fixed cost from either action.
When should a firm stay in the market and when should they shut down?
A firm should stay in the market
- In the short run, if Total Revenue (TR) >= Total Variable Cost (TVC, shutdown point), or
- In the long run, if TR >= TC (breakeven point).