Breakeven and Shutdown Points

1
Break-even and Shut-down Points
Below are the short-run cost curves for Nap
Jeans. If the market price is 30, profit
maximizing quantity is 35 jeans per day.
However, at this quantity the price just equals
the average total cost. This is the break-even
point (i.e., profit equal zero) for Nap Jeans.
For perfectly competitive firms the break-even
point is always at the minimum point of the ATC
curve. For Nap Jeans, the break-even price is 30
( P ATC). If the market price is higher than
30 (P gt ATC), Nap makes a positive profit. If
the market price is lower than 30 (P lt ATC), Nap
incurs a loss.
Even if price falls below ATC and the firm is
incurring a loss, it may still decide to continue
to operate in the short-run. Since it must pay
fixed costs (a sunk cost) in either case,
(operate or shut-down). If the firm can cover its
variable costs (P gt AVC), it should continue to
operate in the short-run. If the firm can not
cover variable cost (P lt AVC), it minimizes
losses by shutting down. The shut-down point is
at the minimum of the AVC curve. For Nap Jeans
the shut-down price is 19.
/unit
MC
Minimum average total cost Break-even point
ATC
Break-even Price
MR P
AVC
Shut-down Price
Minimum average variable cost Shut-down point
35
QBE
QSD
Quantity of jeans/day