GOOD MORNING STUDENTS.

WE ARE HERE TO GIVE PRESENTATION

ON OUR CASE STUDY ON THE SHUTDOWN POINT. OUR TOPIC IS MORE
INTERACTIVE AND MORE PRACTICALLY APPLICABLE. OUR TEAM
MEMBERS ARE BHAGIRATH, HONEY, NIRALI, VISHAKHA AND BHAVIK.
THUS LETS BEGIN THE PRESENTATION. INITIALLY LETS KNOW
SOMETHING ABOUT THE FIRM RITA PRINTS.
ABOUT RITA PRINTS:
LETS THROW THE LIGHT OF SHUTDOWN POINT, TODAY,
ON THE REAL CASE-STUDY OF RITA PRINTS. RITA PRINTS, LOCATED AT
(address), IS A DRESS MATERIAL DEALING FIRM. ITS HIGHEST PROFIT
WAS Rs.20500000. IN MAY 2004. THIS FIRM IS A DRESS MATERIAL
DEALER. IT HAS MORE THAN 50 SHOPS IN SURAT CITY AS WELL AS
TWO MILLS IN SACHIN.
THUS OUR INTROSPECTION WOULD BE ON THIS FIRMS
MOVEMENTS AND THE SHUTDOWN POINT IT FACED. NOW IT HAS
BEEN SHIFTED TO JULLUNDHAR, (address). THE STATISTICS OF THIS
FIRM ARE SHOWN ON THE SCREEN. (T.C. IN 2006 = 41.5crores, T.R. =
39.7crores.)
WE CAN CLEARLY SEE THAT AS FOR THIS FIRM THE T.C.>
T.R., i.e. TOTAL COST IS GREATER THAN TOTAL REVENUE, THUS
GIVING RISE TO THE SHUTDOWN POINT.
SHUTDOWN POINT:
THE CONCEPT: A LIGHT ON PRE CONDITION FOR SHUTDOWN POINT.
THE PRE-CONDITION FOR SHUTDOWN POINT STATES THAT THE EXISTING
MARKET MUST HAVE PERFECT COMPETITION.
NOW FIRST LETS KNOW WHAT IS PERFECT COMPETITION:

Firms in a competitive industry have freedom to enter or exit. With the presence of Super
Normal profits, outside firms start entering the industry.
If, however, some firms are suffering Sub Normal profits or losses, they will not take
the decision to withdraw from the market immediately in the short run.
They will prefer to wait and find out whether market conditions improve to their
advantage.
If they continue to make losses even in the long run the firms will have ultimately to
leave the industry.
This decision is governed by the behavior of the firms Average Variable Cost curve
(AVC).
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.

THE SHUTDOWN POINT CONCEPT CAN BE THEORIZED UNDER

TWO CONDITIONS 1) SHORT RUN, 2) LONGRUN. LETS SEE THE
FIRST ONE:

THE SHORT-RUN CONCEPT.

:
SHORT RUN IS THE PERIOD WHERE SUPPLIERS DONT HAVE ANY
TIME OR HAVE A NEGLIGIBLE TIME TO MATCH THEIR SUPPLY
AGAISNT THE CURRENT MARKET DEMAND. HERE, SUPPLY CAN
BE FULFILLED BUT ONLY TILL SOME PARTICULAR EXTENT.
THUS HERE THE TIME FACTOR IS SCARCE. SO PROPER DECISION
MAKING IS NOT POSSIBLE AT SUCH JUNCTURES.
LETS STUDY THE SHORT RUN CONDITIONS OF RITA PRINTS.

IN THE DIAGRAM ABOVE, OX REPRESENTS output OF RITA PRINTS

AND OY REPRESENTS cost OF RITA PRINTS.

 WE CAN CLEARLY NOTE THAT AT FIRST, ALL S.M.C, A.V.C. AND

S.A.C. CURVES ARE FALLING BUT THE FALL IN S.M.C. CURVE IS
GREATER THAN THE A.V.C. CURVE AND THE S.A.C. CURVE.

ESSENTIALS
A.V.C. i.e. AVERAGE VARIABLE COST IS THE RATIO BETWEEN
TOTAL VARIABLE COST AND TOTAL OUTPUT(Q1 + Q2= Q).
THUS FUNCTIONALLY, A.V.C. = TOTAL VARIABLE COST/TOTAL
OUTPUT i.e T.V.C./T.O.(T.O. = TOTAL OUTPUT)
S.A.C i.e. THE SHORT RUN AVERAGE COST. IT IS THE SUMMATION
OF AVERAGE FIXED COST AND THE AVERAGE VARIABLE COST.
THUS FUNCTIONALLY, S.A.C. = A.F.C. + A.V.C., WHERE A.F.C. =
AVERAGE FIXED COST AND A.V.C. = AVERAGE VARIABLE COST.
S.M.C. i.e. THE SHORT RUN MARGINAL COST, IS THE RATIO
BETWEEN THE CHANGE IN TOTAL COST IN RELATION TO THE
CHANGE IN TOTAL OUTPUT(Q).
FUNCTIONALLY S.M.C. = T.C./ Q, WHERE REPRESENTS THE
change WHETHER ITS increase or decrease.
NOW, MOVE TO THE ANALYSIS PART.
S.M.C. INTERSECTS A.V.C AND S.A.C. CURVE TO ITS MINIMUM
FROM below AND AT THE POINT OF MINIMUM OF A.V.C. THAT IS
POINT A WHERE A.V.C.=S.M.C. AND AT THE POINT OF MINIMUM
OF S.A.C. THAT IS B WHERE S.A.C. = S.M.C.
AFTER THIS INTERSECTION POINT ALL S.M.C., A.V.C. AND S.A.C.
CURVES ARE RISING. BUT THE RISE IN S.M.C. CURVE IS GREATER
THAN A.V.C. AND S.A.C. CURVE.
CONCLUSION: THIS YIELDS THAT when price is as high as P(i.e. COST) the
firm makes normal profits. If the price falls to P1 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.

LONG-RUN CONCEPT

LONG-RUN IS THE PERIOD IN WHICH PRODUCERS HAVE TIME TO MATCH

SUPPLY AGAISNT THEIR DEMAND.

THUS THE CONCEPTUALIZAION OF SHUTDOWN POINT WILL BE QUITE

DIFFERENT HERE.
LETS SEE THE ABOVE DIAGRAM.

 HERE OX REPRESENTS TOTAL OUTPUT AND OY REPRESENTS TOTAL

COST.
IN THE BEGINNING BOTH L.R.M.C. AND L.R.A.C. CURVES ARE FALLING
BUT FALL IN L.R.M.C. CURVE IS GREATER THAN L.R.A.C. CURVE.
L.R.M.C CURVE INTERSECTS L.R.A.C. CURVE TO ITS MINIMUM POINT
FROM BELOW AND AT THIS POINT A L.R.A.C. = L.R.M.C.
AFTER THIS INTERSECTION POINT, BOTH L.R.M.C. AND L.R.A.C. ARE
RISING BUT RISE IN L.R.M.C, CURVE IS GREATER THAN L.R.A.C. CURVE.

ESSENTIALS
THUS FUNCTIONALLY, L.R.A.C. = TOTAL COST/TOTAL OUT PUT, LONG

RUN AVERAGE COST IS THE RATIO BETWEEN TOTAL COST AND TOTAL
OUTPUT.
THUS FUNCTIONALLY, L.R.M.C. =
T.C./
Q, WHERE

REPRESENTS change WHETHER increase or decrease. L.R.M.C. IS THUS

THE RATIO BETWEEN THE CHANGE IN TOTAL COST IN LONG RUN IN
RELATION TO THE CHANGE IN TOTAL OUTPUT IN LONG RUN.