Shutdown Rule

See the three conditions table in Perfect Competition.

Why SR P $\ge$ AVC, LR P $\ge$ ATC?

In SR, a firm has no time to adjust capacity. And no matter how much economic profit it makes, it needs to pay the fixed cost whether it produces or shuts down. So what matter for shutting down production is the variable cost. $TR \ge VC \leftrightarrow P \cdot q \ge AVC \cdot q \leftrightarrow P \ge AVC$

In LR, as all factors are variable, so the total cost is counted. $TR \ge TC \leftrightarrow P \cdot q \ge ATC \cdot q \leftrightarrow P \ge ATC$

Shutdown vs Marginal rule

The marginal rule looks at one unit: “next unit costs more than $P$ ” means stop adding units, not shut down. The shutdown rule looks at all units: produce only if $TR \ge VC$ ( $P \ge AVC$ ) at the best $q$ .

Shutdown vs exit

SR decision is shutdown, which means no production temporarily. LR decision is exit, which means leaving the market.

Shutdown ≠ break-even

$P = ATC$ is break-even (zero profit), not shutdown. SR shutdown line is $P = AVC$ . Between them ( $AVC \le P < ATC$ ): loss, but keep producing.

Links: Sunk Cost, Supply Curve, Monopoly

Why SR P ≥\ge≥ AVC, LR P ≥\ge≥ ATC?

Why SR P $\ge$ AVC, LR P $\ge$ ATC?