Shutdown Condition

• Adjustment to long run in perfect competition with losses in short run

  1. Supply curve shifts left

  2. Some firms leave loss-making industry

  3. Some firms continue producing
• Shutdown condition in perfect competition


  Condition to determine whether firms should continue producing or shut down
• Companies in perfect competition


  • Company A
  • Company B
  • Company C
• Company A continues producing

  • Losses are 120,000
  • Losses if shut down are 100,000
• Company B continues producing


  • Losses are 100,000
  • Losses if shut down are 100,000
• Company C continues producing


  • Losses are 90,000
  • Losses if shut down are 100,000
• Companies may continue producing even if losses are the same, due to loyalty to customers or desire to maintain employment
• Shutdown condition


  Occurs when average revenue (price) equals average variable cost
• Shutdown condition is different from breakeven condition (where price equals average cost)
• Determining whether firm should shut down

  1. If average revenue is less than average variable cost, firm should shut down

  2. If average revenue is greater than average variable cost, firm should continue producing in short run