Shutdown Point



This diagram shows the profits from operating when P < AVC. If a firm were to operate, the profit maximizing output would be where P = MC, which is Q. Profits at Q are (P - AC) Q which is negative because P < AC. Losses (negative profits) are the two boxes, -FC and X Loss added together. Since the firm would only incur the loss of FC if it shutdown and it incurs the loss of FC and X (for extra) Loss by operating, it is better off to shutdown.