Break even point and shut down point

Break-even point

Break even is said to occur when:

TR = TC

Or, TR / Q = TC / Q

Or, P = AC

A firm is just covering all its costs

break even point

Break – even occurs at point Q. Here AR (price) = AC= or TR = TC. The firm is just making normal profits.

AC = LQ = OP

A firm is just covering its costs as price (=OP) happens to be equal to AC (average cost) = LQ

It is a situation of  no - profit no - loss situation.

Shut – down point

Shut – down point occurs when a firm is just covering its variable cost only. Or, it is a situation when:

TR = TVC

TR / Q = TVC / Q

AR = AVC

Here, the firm is incurring loss of fixed cost. Does it mean that the firm will suspend production of the commodity? Not necessarily. It may continue to produce because the loss of fixed cost is to be incurred even when output is suspended.

shut down point

Shut down occurs at point Q. Here, AR = AVC = LQ = OP. The firm is incurring the loss of AFC (average fixed cost) per unit of output.

Total loss to the firm = AFC x output

= TFC for a given level of output

Thus, price (or average revenue = OP) = average variable cost (= LQ).

Q is known as shut down point because the firm would not like to operate below this.