The shut down rule is a decision-making guideline for firms in the short run. It states that a firm should shut down production if the price falls below its average variable cost.
Imagine you have a lemonade stand, and your costs to make each cup of lemonade are $1. If the price of each cup falls below $1, it would be better to shut down the stand rather than continue selling at a loss.
Average Variable Cost (AVC): The average variable cost is the total variable cost divided by the quantity produced. It represents the cost per unit of producing additional units.
Short Run: The short run refers to a period of time where some factors of production are fixed, such as capital or plant size.
Marginal Cost (MC): Marginal cost is the change in total cost when one more unit is produced. It helps firms determine whether it's profitable to produce additional units.
Study guides for the entire semester
200k practice questions
Glossary of 50k key terms - memorize important vocab
© 2024 Fiveable Inc. All rights reserved.
AP® and SAT® are trademarks registered by the College Board, which is not affiliated with, and does not endorse this website.