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  • Malaysia's leader said on Saturday communications aboard a missing jet were switched off and its course deliberately changed by someone on board before the aircraft disappeared a week ago, but stopped short of saying it had been hijacked.

  • Ukraine braced on Saturday for a breakaway vote in Crimea as deadly violence flared again in the ex-Soviet country's tinderbox east amid the biggest east-west showdown since the Cold War.

  • Finally, the TRS chief K Chandrashekhara Rao has broken his silence over possibility of an alliance with the Congress in Telangana. After saying a firm 'no' to merger with the Congress, KCR has now ruled out any alliance with the Congress in both Assembly and Lok Sabha elections to be held on April 30.

  • The Bharatiya Janata Party's much anticipated list of Lok Sabha candidates is expected shortly which will end the the suspense over who will contest from Varanasi - its prime ministerial candidate Narendra Modi or party veteran Murli Manohar Joshi.

  • The Delhi High Court has confirmed death penalty to all four convicts of the December 16 Delhi gangrape and murder case. The four were convicted in September 2013 for raping and murdering a 23-year-old paramedical student.

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    Home >> Economics >> Use A Graph To Explain The Concept Of Shut Down

    Use A Graph To Explain The Concept Of Shut Down

    The main aim of a firm is to reach profit maximization which takes place when marginal cost is equal to the marginal revenue (MC=MR). Profit maximization or the breakeven point is a desirable place for firms to be in as it is the point where it is productively and allocatively efficient. The firm is still making normal profit while covering all its costs.

    In the short run, average variable cost must be covered if the firm is to continue in the business. The space above the breakeven point is abnormal profit and supernormal profit above the breakeven point. The firm can cover all of their average variable cost and still make a lot of profit. The space below the breakeven point but above the shut down point is subnormal profit where the firm makes fewer profit than normal profit which means that the firm can still cover the average variable cost but are not making any normal or supernormal profit.

    When a company cannot cover average variable cost, a company will reach a shut down point. The shut down point takes place in the short run (when at least one variable is fixed) where the company stops its production but does not completely exit the industry. The company still needs to pay the fixed cost but it does not need to pay for the variable cost for example the labor. Shut down usually takes place when one of the factors of production is scarce. For instance; Thailand exports technology used in the production of cars to Japan. However, due to the floods in Thailand, Thailand could not export the technology. Thus, the car companies in Japan reached shut down point.   

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