Question

Using a diagram, explain the concept of:

Shut-down point

Answer 1

The point at which a business can only pay for its variable costs is called the shutdown point. In other words, TR is equal to TVC, or AR is equal to AVC. The company loses fixed costs when it shuts down. At this time, the company isn’t stopping production. If AR keeps going down, though, and the company can’t even pay the AVC, it will have to stop doing business. It can be shown using a diagram: