A LEVEL ECONOMICS
NOTES
Discuss whether the firm should shut down (12 or 15 marker)
Point 1: Not shut down= Covering its variable costs
If a firm is covering its variable costs i.e. producing at an output where AVC<AR, the firm should not
shut down=
Thus, the loss will be greater if they shut down=
The total area of loss if they shut down would be (AC1ACAVC1) however, if they continue production,
then they will eventually cover their fixed costs as they have already paid these=
Thus, the loss area if they continue production will be (AC1ABP1)=
NOTES
Discuss whether the firm should shut down (12 or 15 marker)
Point 1: Not shut down= Covering its variable costs
If a firm is covering its variable costs i.e. producing at an output where AVC<AR, the firm should not
shut down=
Thus, the loss will be greater if they shut down=
The total area of loss if they shut down would be (AC1ACAVC1) however, if they continue production,
then they will eventually cover their fixed costs as they have already paid these=
Thus, the loss area if they continue production will be (AC1ABP1)=
