Shut Down Rule
Definition
The shut down rule is a decision-making guideline for firms in the short run. It states that a firm should shut down production if the price falls below its average variable cost.
Analogy
Imagine you have a lemonade stand, and your costs to make each cup of lemonade are $1. If the price of each cup falls below $1, it would be better to shut down the stand rather than continue selling at a loss.
Related terms
Average Variable Cost (AVC): The average variable cost is the total variable cost divided by the quantity produced. It represents the cost per unit of producing additional units.
Short Run: The short run refers to a period of time where some factors of production are fixed, such as capital or plant size.
Marginal Cost (MC): Marginal cost is the change in total cost when one more unit is produced. It helps firms determine whether it's profitable to produce additional units.
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