1. LEVEL 3 ECONOMICS AS3.1 Understand marginal analysis and the behaviour of firms
Understanding Economics Chapt 7, P67-74
Breakeven and Shut Down Point
The price at which a firm will
breakeven
The price at which a firm
KNOW will/should shut down.
 That when a firms Total Revenue is equal to
its Total Economic Costs then it will
breakeven.
 When a firm receives a price that will not
UNDERSTAND
cover at least its variable costs it should
shutdown.
THINKING – MANAGING SELF – PARTICIPATING AND CONTRIBUTING - RELATING TO OTHERS – USING LANGUAGE, SYMBOLS and TEXT

2. Breakeven point
• This is the point where price is equal to
average cost or P=AC
• At this price the firm is covering all of its
economic costs (recall this is accounting cost
plus opportunity cost)
• In economics when a firm is at a breakeven
point it is said to be earning a normal profit.

3. Break even point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
300 QUANTITY
If this firm is receiving a price of $10 and is selling a quantity of 300
Its total revenue will be?

4. Break even point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
300 QUANTITY
You should know that Total Revenue is equal to price times quantity (P x Q)?
In this case that is $10 x 300 units = $3000

5. Break even point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
300 QUANTITY
You should also see that in this case as the price (or cost) of $10 cuts the ATC
(AC) curve then $10 is also the average cost at an output level of 300 units?

6. Break even point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
300 QUANTITY
You should know that Total Cost is equal to cost times quantity (C x Q)?
In this case that is $10 x 300 units = $3000

7. Break even point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
300 QUANTITY
So we have a Total Revenue (TR) of $3000 and a Total Cost (TC) of $3000 at an
output of 300 units. TR – TC = Profit OR $3000 - $3000 = 0 or BREAK EVEN

8. Shutdown point
• Recall that Total Cost =FC + VC
• If a firm can’t even receive a price to cover the VC of
producing a good then it should shutdown.
• In this case though it will still have to pay its fixed costs
• At any price point between shutdown (above AVC) and
breakeven at least the firm will receive a contribution to cover
FC so it will continue to operate.
SHUTDOWN is where P = AVC

9. SHUTDOWN point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
8
300 QUANTITY
This firm is receiving a price of $8 and is selling a quantity of 300
Its total revenue will be $8 x 300 = $2400
Its total variable costs will be $8 x 300 = $2400

10. SHUTDOWN point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
8
300 QUANTITY
This firm is receiving a price of $8 and is selling a quantity of 300
Its total revenue will be $8 x 300 = $2400
Its total variable costs will be $8 x 300 = $2400
It should SHUTDOWN, there is no sense in opening the doors.

11. SHUTDOWN point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
8
300 QUANTITY
What does the shaded area in the diagram represent?

12. SHUTDOWN point – An example
PRICE $
COST $ MC
REVENUE $
ATC
10
AVC
8
300 QUANTITY
What does the shaded area in the diagram represent?
If you identified this area as total FC at output 300 you are right! So you will
see that at the Shutdown point of $8.00 the firm is not covering any of its FC.
At any price between $8 and $10 it will at least be able to pay off some of its
Fixed Costs (FC) so it makes sense to keep operating. At least in the short term
and until the price in the market improves.

13. Hopefully you are clear about Break
Even and Shutdown point?
B/E is where P = AC
SHUTDOWN is where P = AVC
Feel free to review these slides again if you need to. If you are
ready to move on close this slide show and go to the next step
in the lesson.