# What is the break even point and the shut down point?  Explain the significance of these points in relation to the output decisions of a competitive firm.

The break even point is the point at which a company's revenues equal its expenses for a certain time period. To calculate the break even point for sales, you need to know the fixed costs (costs that don't change depending on the volume of sales, such as the cost of renting the factory in which the product is manufactured or the cost of paying salaries and taxes); variable costs (costs that change depending on the sales volume, including the cost of producing each unit); and the sales price of the product. To find the break even point, you divide the fixed costs by the quantity represented by the price minus the variable costs. That will provide the break even point in units sold. The break even point helps managers determine the output they will need to start earning a profit at a particular price. If, for example, they are worried about selling a particular number of units to turn a profit, they will have to price each one higher to turn a profit, given their fixed costs.

The shut down point is the lowest price a company can use for a product to justify continuing to produce that product in the short term. In the short term, the cost per unit must be greater than the variable costs for a product, or the company must discontinue producing it. A company's fixed costs remain the same no matter the output of the company. If a company can earn more than the shut down point, it can use the revenue to contribute to paying its fixed costs. The shut down point helps companies determine the minimum output at a certain price that they need to pay their variable costs.

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The break-even point refers to the point at which total cost and total revenue are equal. At the break-even point, a business has neither gained a net profit, nor suffered a net loss. In relation to the output decisions of a competitive firm, the break-even point is a reliable indication of the amount of output needed before a business can begin to make a net profit. If a business cannot meet this demand, then it is unlikely that they will be able to continue functioning since the break-even point is the bare minimum level to which sales revenue must aspire.

On the other hand, the shut-down point is the point at which total revenue is equal to variable cost. At this point, there is neither incentive to continue production, nor incentive to limit it. In relation to the output decisions of a competitive firm, the shut-down point is a reliable indication of the point at which a business should consider shutting down production. If a business cannot even meet the demands of its variable costs, then the business is operating with costs that are greater than the benefits generated by those operations, even if costs remain fixed.