Operating minimum
In microeconomics , the operating minimum is understood to be the x-coordinate of the low point of the average variable costs (variable unit costs). If the product price falls below these costs, no contribution margin can be achieved. So production would have to be stopped.
The price that corresponds to the variable unit costs incurred in the operating minimum is referred to as the “short-term lower price limit”. For example, when the market price for the goods produced fluctuates, a company can temporarily reduce the price to this price limit in order not to be forced out of the market by the competition. The fixed costs are not covered, the associated loss can be accepted at short notice.
In addition, when production is at the operating minimum, the goal of profit maximization will only be pursued under certain circumstances : after all, the losses here are just as high as when production is discontinued, the products do not generate any contribution margin . The losses that occur precisely during production at the operating minimum are therefore the fixed costs .
When producing an output amount between the operating optimum and operating minimum, a positive contribution margin that covers at least part of the fixed costs is generated. Loss minimization and thus profit maximization are thus achieved.
The operating minimum is calculated by setting the first derivative of the variable unit cost function = 0. If one then uses the production quantity thus determined in the variable unit cost function , one obtains the short-term lower price limit .