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.