Shutting down is one of three short-run production alternatives facing a firm. All three are displayed in the table to the right. The other two are profit maximization and loss minimization.

• With profit maximization, price exceeds average total cost at the quantity that equates marginal revenue and marginal cost. In this case, the firm generates an economic profit.


• With loss minimization, price exceeds average variable cost but is less than average total cost at the quantity that equates marginal revenue and marginal cost. In this case, the firm incurs a smaller loss by producing some output than by not producing any output.

Shutting Down

The key criterion for this decision is price relative to average variable cost.

• If price is less than average variable cost, a firm does not receive enough revenue to pay variable cost let alone any part of fixed cost. As such, the economic loss of operating is GREATER than total fixed cost. A firm is better off shutting down production in the short run, producing zero output, and awaiting a higher price.


• If price is greater than average variable cost, a firm receives sufficient revenue to pay ALL variable cost plus some fixed cost. As such, the economic loss is LESS than total fixed cost. A firm is better off producing the quantity that equates marginal revenue and marginal cost than producing no output, receiving no revenue and incurring a loss equal to total fixed cost.