Lesson 2 of 8 · 13 min
Breakeven, shutdown and exit decisions
A firm breaks even where price equals average total cost, keeps operating in the short run as long as price covers average variable cost, and exits in the long run if it cannot cover total cost.
In short
- Breakeven: TR = TC, or equivalently price (AR) = ATC. Under perfect competition the breakeven point is the minimum of ATC.
- Shutdown point: the minimum of AVC. Below it, the firm cannot even cover variable costs and loses less by shutting down.
- Between minimum AVC and minimum ATC, the firm operates at a loss in the short run because revenue covers all variable cost and part of fixed cost.
- Sunk costs cannot be recovered whatever the firm does, so they are ignored in the short-run decision.
- Long run: stay only if TR ≥ TC; otherwise exit.
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