Key Diagrams - Short Run Shut Down Price

In this short revision video we build an analysis diagram showing the short run shut-down price for a business.

In the short run, we assume that a business needs to cover at least their variable costs to continue producing. This also assumes that the fixed costs of production are lost if a plant / factory is shut down.

It is not inevitable that production will shut down if the price per unit falls below average variable cost. Firms might think that there has been a temporary fall in demand or a short-lived rise in costs which causes higher losses. They might be able to raise new debt or fresh equity to tide them over. Government financial support such as the furlough scheme used during the pandemic might also be significant.