Question

Explain the concepts of break-even point and shut-down point, using a suitable diagram.

Answer 1

At break-even point, a firm makes normal profits. At this point, total revenue and total cost are equal.Profits are said to be normal when TR=TC or AR=AC. Normal profits are defined as the minimum return that the producer expects from his capital invested in the business. Normal profits are a part of total cost.A firm reaches shut-down point when: AR=AVC.When a firm is able to cover its variable costs only, it will be at shut-down point. At shut-down point, the firm no longer gets benefits from its operations.