Question

what break-even price is for a firm. At the break-even price, explain what the economic profits are for a firm. Would a firm continue to operate permanently at the break-even price? Define the key terms including break-even price and economic profits. Explain the implications of having zero economic profits in relation to alternative business ventures that the entrepreneur can pursue. Provide examples

Answer 1

ANSWER :

break even point:- breakeven point is that producion level at which total revenue equals total expenses. it represents a no profit no loss situation, all the cost that must be paid are paid and there is no profit or loss.

break even point formula :       fixed cost /(price per unit - variable cost)

ECONOMIC PROFIT : economic profit at break even point is a situation where the total cost is completely covered. economic profit is a financial performance indicator, not a profitability indicator.

     economic profit = total income- economic cost

at a break even point there is a situation of no profit and no loss, economic profit is when a firm is able to cover its fixed cost fully, that is also called normal profit.

a firm can continue to operate at break even point as long as its covering its costs. but if the average revenue earned is not even enough to cover variable cost of the product than firm should shut down its business. it can continue as long as AR>=AVC , if it goes below this point it should shut down.

--implication of having zero economic profit :

when a firm is having zero economic profit it is called normal profit , it is because its covering its fixed cost and opportunity cost, the amount of fixed cost and opportunity cost is considered profit here. it indicates the business is running smoothely , zero economic profit can be used to measure whther the business is running smoothing or not and whether to expand or not, invest in other ventures or not. in a state of zero economic profit a firm certainly can invest in other ventures.

example : HONEY'S BAKERY OWNED BY HONEY generates an average revenue of 150000$each year and honey has 2 employees. each of whom she pays 20000$ each year and she takes an annual salary of 40000$, she also pays 20000$ as rent and 30000$ for other supplies. and the opportunity cost for running this business full time is 20000$ per year.

explicit cost for honey's bakery = 20000$+ 20000+40000+20000+30000= 130000, this results in accounting profit befoe taxes of 20000$ but opportunity cost is of 20000 that means her total cost is 150000 hence zero economic profit or normal profit.

by this example we can clearly say that by zero economic profit it does not mean that a company is not earning profit, so a business can expand or diversify however they want in this state and can run its other business ventures smoothly.