Question

In the context of output supply, what is the shut-down condition? How does it modify the firm’s supply decision?

Answer 1

Shut down condition is the point where firm can get revenue to cover only variable costs and getting losses equal to fixed costs. If the firms is unable to cover fixed costs and variable costs also, then firm will go for shut-down. Here, the marginal profit becomes negative.

To operate a firm, the market price should be greater or equal to average variable costs. If the firm is not able to bear the variable costs, the firm should shut-down its operation.

Thus, based on shut-down rule, the firm is able make decision either it will continue the production or not.