So long as market price is above AVC the firm will cover all its variable costs and the same fixed c

So long as market price is above AVC the firm will cover all its variable costs and the same fixed c

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So long as market price is above AVC the firm will cover all its variable costs and the same fixed costs as well. If the price falls below AVC the firm will have to close down and to stop productive activity. This is because variable cost is current expenditure which a firm must expect to cover at market price. If it is unable to cover fixed costs the firm can wait and hope to cover them in the long run. In Figure 37 when price is as high as P the firm makes normal profits. If the price falls to
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Unformatted text preview: P 1 then the firm still covers all its variable costs plus part of the fixed costs. If the price further falls to P2 the firm cannot cover even its variable costs. It is then advisable that the firm should close down. Therefore Shutdown point for a firm is one where price is just equal to its Average Variable Cost or below AVC....
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