question_answer

Explain the concept of break-even point and shut down point with the help of a diagram.

Answer:

Break-even Point Break-even for a firm occurs when it is able to cover all its costs of production. Accordingly, break-even point is defined as a situation where TR=TC or TR/Q=TC/Q or AR=AC. Under this situation, the firm earns only normal profits. Output (units) Diagram Showing Break-even Point Break-even is said to occur, when,                         TR=TC \[\Rightarrow \]            \[\frac{TR}{Q}=\frac{TC}{Q}\Rightarrow P=AC\] In the diagram given above, break-even is struck at point 0 where AR (Price) = AC. A firm is just covering its costs as price (OP) happens to be equal to AC (QL). Here,                 TC=Total Cost;              TR=Total Revenue                         P=Price;                        Q=Quantity                         AC=Average Cost;         AR=Average Revenue                         MR=Marginal Revenue                                                     Shut Down Point It occurs when a firm is just covering its variable costs or it is a situation when, Output (units) Diagram Showing Shut Down Point               TR=TVC                                                          or           \[\frac{TR}{Q}=\frac{TVC}{Q}\]          or         AR=AVC                                                                                                      Here, the firm is incurring loss of Fixed Cost only. In the diagram given above, shut down is struck at point 0 where AR (Price) = AVC. A firm is operating a price just covering its AVC.                                                                       ' Thus, Price=AVC When AR=AVC. Its total loss is equal to Total Fixed Cost (TFC) for a given level of output.              Here,          TR=Total Revenue                TVC=Total Variable Cost                   Q=Quantity                         AVC=Average Variable Cost                  AR=Average Revenue            MR=Marginal Revenue