username1900467
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Report Thread starter 4 years ago
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I was wondering if anyone could explain the following-

What is the "shutdown position" ?

Why would a firm continue to produce if it was making a loss?

Thank you to those who can help and good luck to everyone sitting the paper!
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FLS
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A firm will continue to operate in the short term if it is making a loss as long as it is able to cover its variable costs. If the price of their good is greater than average variable cost they will continue to produce (P>AVC). If the price of their good is less than average variable cost they will shut down (P<AVC). The Shutdown point is where P=AVC, the firm must decide whether it should continue producing or whether it should shut down.

If the firm is able to pay its variable costs then any additional revenue it receives will be able to contribute to paying their fixed Fixed Costs.

If a firm shuts down it will still have to pay it's fixed costs and therefore this is why a firm should remain in operation (providing it can cover variable costs) if they are making a loss.
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