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Q. Explain the Shut down point?
ShutdownPoint: With MR = MC, firm attains equilibrium at point E where it produces OM amount of the output. To produce this output, firm incurs an average cost of MF whereas it earns average revenue ME. At equilibrium MF > ME, firm incurs a loss of EF per unit of output produced. Because the total revenue earned is only OPEM, whereas the total cost incurred is ORFM, firm incurs a total loss of PRFE. Loss incurred is too much for this firm to continue, as this firms' AVC curve is also above its AR = MR curves - i.e. it's unable to cover even its AVC. In the above condition, at output OM, firm's AVC, is equal to MG that is greater than AR = ME. Therefore this firm isn't even recovering its daily or running expenses so it should shut down.
Figure: Shut down point
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