The minimum point of the AVC in the short run and the minimum point of the LRAC curve is known as:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Shut down point
A firm that stops producing still has to pay its fixed cost; only its variable cost disappears. So it keeps producing as long as the price covers what it can save by closing, and stops only when it cannot. The last point at which it still produces a positive output is its shut down point, and it lies at a different place in the short run and in the long run:
Short run: the firm produces as long as the price is at least the minimum of AVC, where the SMC curve cuts the AVC curve. At that price it loses only the fixed cost it would bear anyway; below it, it closes down.
Long run: there is no fixed cost, so the firm produces only if the price covers its whole average cost, and its shut down point is the minimum point of the LRAC curve.
Why the other options are incorrect
Option (1) Profit maximisation point — Incorrect. A firm maximises profit where the price equals marginal cost on the rising part of the MC curve, with the price at least equal to AVC in the short run and to LRAC in the long run. That point moves with the price and is not tied to the minimum of AVC or LRAC; the minimum points mark only the lowest price at which the firm produces at all.
Option (3) No profit but loss only point — Incorrect. There is no such point.
Option (4) Super normal profit point — Incorrect. Super-normal profit is the profit a firm earns over and above the normal profit. It arises when the price is above the minimum of average cost, so it is never earned at the minimum point of a cost curve.
Note: The original NTA paper printed Option (1) as ‘Break-even point’. NTA accepted it as well as Option (2), because in the long run the break-even point is also the minimum of LRAC, the same point as the shut down point; in the short run, however, the break-even point is the minimum of SAC and not of AVC. For the benefit of students and to ensure a single answer, Option (1) has been changed to ‘Profit maximisation point’.
NCERT (2025-26): “4.4.3 The Shut Down Point Previously, while deriving the supply curve, we have discussed that in the short run the firm continues to produce as long as the price remains greater than or equal to the minimum of AVC. Therefore, along the supply curve as we move down, the last price-output combination at which the firm produces positive output is the point of minimum AVC where the SMC curve cuts the AVC curve. Below this, there will be no production. This point is called the short run shut down point of the firm. In the long run, however, the shut down point is the minimum of LRAC curve. 4.4.4 The Normal Profit and Break-even Point The minimum level of profit that is needed to keep a firm in the existing business is defined as normal profit. A firm that does not make normal profits is not going to continue in business. Normal profits are therefore a part of the firm’s total costs. It may be useful to think of them as an opportunity cost for entrepreneurship. Profit that a firm earns over and above the normal profit is called the super-normal profit. In the long run, a firm does not produce if it earns anything less than the normal profit. In the short run, however, it may produce even if the profit is less than this level. The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.…” |