Break-Even Point
What is Break-Even Point?
The break-even point is the output level where total revenue equals total cost, resulting in zero economic profit.
At this point, the firm covers all explicit and implicit costs, including normal profit. Price equals average total cost, and the firm has no incentive to exit or enter the market.
Break-Even Point: a worked example
A competitive greenhouse has fixed costs of $3,200, of which $1,200 is the implicit cost of the owner's own capital, and variable costs of $1,600 when it grows 400 flats of seedlings. Total cost is $3,200 + $1,600 = $4,800, so average total cost is $4,800 / 400 = $12.00, and 400 flats is where the ATC curve bottoms out, so marginal cost equals $12.00 there too. At a market price of $12.00 total revenue is $12.00 x 400 = $4,800, exactly matching total cost, so economic profit is $4,800 - $4,800 = $0. That price and quantity are the break even point. Average variable cost is $1,600 / 400 = $4.00, far below price, so if price slipped to $9 the grower would post a loss and still keep operating in the short run, since every dollar above $4.00 pays down part of the $3,200 of fixed cost.
The mistake students make with break-even point
Hearing zero economic profit, students conclude the greenhouse earns nothing and should close. Zero economic profit means the owner earns exactly as much as the next best use of her time and money, which the implicit $1,200 already counts, so accounting profit at the break even point is a positive $1,200. The second slip is treating break even and shutdown as one point. The break even price sits at minimum average total cost, where price equals ATC; the shutdown price sits lower, at minimum average variable cost. Between those two prices the firm loses money and produces anyway, because closing leaves the fixed cost unpaid with no revenue at all.
Break-Even Point questions
What is the difference between the break even point and the shutdown point?
Break even is the price and quantity where total revenue equals total cost, found at the minimum of average total cost. The shutdown price is lower, at minimum average variable cost, below which producing deepens the firm's losses. Between those prices the firm operates at a loss on purpose, because revenue covers all of variable cost and part of fixed cost, so closing would hurt more. Below minimum AVC every unit sold adds to the loss and the firm stops.
Does zero economic profit mean the business is failing?
Zero economic profit means normal profit, the ordinary return that keeps an owner in this line of work instead of the next best alternative. The accountant's books still show a positive number, because implicit costs such as a forgone salary never appear there. A market where every firm earns zero economic profit is in long run equilibrium: nobody has a reason to enter and nobody has a reason to leave.
Where is the break even point on a cost curve graph?
Look for the point where marginal cost crosses average total cost, which is the lowest point on the ATC curve. Draw a horizontal price line through that intersection and you have the break even price: the profit maximizing firm sets marginal cost equal to that price, price also equals ATC, and the profit rectangle has zero height. Above that price line the firm earns economic profit, below it the firm takes a loss.
Formula / Example
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Related terms
Common comparisons
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