What is the shutdown price?

In economics the shutdown price, sometimes called the shutdown point, is the lowest price a firm in perfect competition is willing to take before shutting down.
  • This is shown on a diagram at the point where AR=AVC.
  • Only firms in perfect competition have a shutdown price.
  • Initially the firm makes a supernormal profit.
  • As the price falls the firm will make a normal profit AR=AC.
  • As the price falls below AR=AC the firm begins to make a loss. 
  • The firm can continue to make a loss down to the shutdown price (AR=AVC).
  • Below the shutdown price the firm is no longer able to cover its variable costs such as rent, wages or raw materials.
  • The firm will shutdown, maybe temporarily, until the price level has risen again.

Shutdown Price Diagram in Perfect Competition

The image shows three cost and revenue diagrams for a firm. each diagram has identical marginal cost, average cost and variable cost curves. The first diagram has a high price showing supernormal profit, the second diagram has a lower price showing a normal profit and the final diagram has an even lower price showing the firm's shutdown price. This is sometimes called the shutdown point.
The shutdown price in perfect competition