Shutdown

• firms need normal profit to at least survive in the long run
• normal profit is achieved when the price is equal to average total costs
• a firm can make below normal profit (subnormal profit) for short periods of time and still operate
• a firms price CANNOT fall below the level of average variable cost - otherwise it will SHUTDOWN
• if a firms price is greater than average variable cost but still lower than average total costs, then the firms will make subnormal profits - and will shut down in the long run (not immediately)
• a firm will not shut down immediately if they are making subnormal profits because they are able to cover average variable cost
• FIRM SHUTDOWN GRAPH

  At P1, firm makes normal profit as price = ATC

  Between P1 and P2, firm will make subnormal profit and shut down in the long tin

  Below P2, firm will shut down immediately as they wont be able to cover cost of production

  
• if you want to produce more, variable costs will rise
• need to be able to pay variable costs otherwise firm cant produce more output
• fixed costs don’t have to be settled immediately
• fixed costs don’t depend on output, so it you want to produce more, you’re fixed costs stay the same
• however if fixed costs aren’t paid for in the long run, business will fail