The shut-down point is the point at which a firm would be better off closing its operations and producing zero output. Shutting down is not the same as going out of business; it is temporarily suspending production. If a firm shuts down, it will still incur fixed COSTS, often labor, rent, and other payments the firm has committed to paying. In some situations, if the firm’s total revenue were very low, it would lose more MONEY by continuing to produce than by shutting down. For the owners of many seasonal businesses, there is likely to be so few sales at certain times of the year that they are better off temporarily closing down. For years ski areas logically closed down for the summer, and beach resorts closed in the winter. Some ski areas have found there is summer demand from mountain-bike riders and people just wanting a scenic view and thus have reopened in the summertime. While ski-area operators are probably not making a PROFIT from their summer business, total revenue is greater than total variable costs, contributing to paying some of the fixed costs. The ski area is losing less money in the summertime by being open than by closing. In economic analysis, the shut-down point is the point at which total revenue just equals total variable costs, or price just equals average variable cost. If price just equals average variable cost, the firm is losing money, its fixed costs, but is “covering” its variable costs. At the shut-down point, the firm is losing the same amount of money regardless of whether it is operating or closed. In the real world, most owners are optimistic about their business, which is why they started their firm. Many small-business owners, especially new entrepreneurs, will ignore the shut-down point rule. They expect to quickly increase sales or be able to raise their price to overcome their losses. These owners can stay in business as long as they have CAPITAL or financing from creditors.
See also SUPPLY RULE.