Question

How does break-even point differ from shut down point? Indicate break-even point in a diagram.

Answer 1

• Break-even point: Price (average revenue) equals average cost (AR = AC). The firm exactly covers all costs (including normal profit); profit = 0 (no‑profit, no‑loss).
• Shut‑down point: Price equals average variable cost (AR = AVC). The firm covers its variable costs but not fixed costs; losses equal total fixed costs. If price falls below this point (P < AVC) the firm should shut down in the short run.