Question

Distinguish between break-even point and shut-down point with the help of a diagram.

Answer 1

Sr. No.	Break-even point	Shut-down point
1.	At P0 price (P0 = AR0 = MR0), SMC curve cuts MR0 from below at E0, giving E0 as the equilibrium point and OQ0 as the equilibrium quantity. At P0 price, the firm is able to cover only variable cost since P = AVC. Below P0 price, nothing would be produced since P < AVC. E0 is known as shut-down point because the firm would not like to operate below this point.	AR (Price) = AVC Now, if the price rises to P1, equilibrium point shifts to E1, where SMC = MR, and AR = SAC, and the equilibrium quantity increases to Q1. Point E1, where the SMC curve cuts the minimum point of SAC, is known as ‘break-even point’ because the firm is able to cover all the costs-both variable costs and fixed costs at OP1 price.
2.	Shut-down point is the situation where the firm covers only variable costs.	Break-even point is the point where the firm just covers its costs.
3.