Shut Down Point For A Perfectly Competitive Firm:

This section provides an analysis of the short-run supply decisions of the perfectly competitive firm.

The Short-run Supply Decision of the Perfectly Competitive Firm

If a firm shut down operation in the short-run, it will incur a loss equal to its total fixed cost (TFC) because no variable cost will be incurred. Therefore, the perfectly competitive firm will shut down and produce nothing at any price below which the firm's loss will exceed its total variable cost (TVC) to include a fraction of or all the TFC.

Figure: The Short-run Shutdown Point for the Firm in Perfect Competition

In Figure , the firm's short-run supply curve is the short-run marginal cost (SMC) curve above that point A, the shutdown point corresponding to the output level (Q1) and price (P1) below which the firm cannot cover average variable costs (SAVC) in the short-run.