Question

2. Briefly explain how the zero profit point and the shutdown point for a firm operating in a perfectly competitive market are each determined. (include equations if any)

Answer 1

Answer : Zero profit point : The zero profit point is also known as breakeven point. The zero profit point is that point where the price is equal to the minimum ATC (Average Total Cost); i.e., P = Minimum ATC. We know that profit = total revenue - total cost. If P = Minimum ATC occur then total revenue and total cost become equal. As a result, the profit become zero. So, for a perfectly competitive firm the zero profit point is that point where P = Minimum ATC occur.

Shutdown point : The shutdown point is that point where the price is equal to the minimum AVC (Average Variable Cost); i.e., P = Minimum AVC. If price is equal to the minimum AVC then the total revenue become insufficient to cover the total variable cost. Hence firm decide to shutdown it's production if P = Minimum AVC occur. So, for a perfectly competitive firm the shutdown point is that point where P = Minimum AVC occur.