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Competitive Firm: Break-Even and Shut-Down Points ISC 12

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EconomicsISC Class 12 · Main Market Forms and Equilibrium of a Firm

Short-Run Equilibrium of a Perfectly Competitive Firm: Profit, Loss, Break-Even and Shut-Down Points

Updated 17 October 2026 · Fact-checked

A perfectly competitive firm is a price taker, so its AR = MR = price, and it is in short-run equilibrium where MC = price with MC rising. At the break-even point price equals minimum AC and the firm earns only normal profit; at the shut-down point price equals minimum AVC. If price is below minimum AVC the firm shuts down, because it cannot even cover variable cost; between the two points it continues at a loss.

Understand Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points

1. Features of perfect competition (meaning only). Many buyers and sellers, each too small to affect the price; a homogeneous product; free entry and exit of firms; perfect knowledge of market conditions; perfect mobility of factors. The result: the industry's demand and supply fix the price and the firm is a price taker, facing a horizontal demand curve at the market price (AR = MR = P).

2. Other market forms (meaning only, for comparison). Monopolistic competition: many sellers with differentiated products. Oligopoly: a few sellers, mutually interdependent, product may be homogeneous or differentiated. Monopoly: a single seller of a product with no close substitutes. Monopsony: a single buyer in the market.

3. Equilibrium of the firm in the short run. The firm maximises profit, so the conditions are MC = MR = price and MC cuts MR from below (MC is rising). Output is then fixed at the price taker's chosen quantity. Whether the firm earns profit depends on price relative to AC:

  • P > AC (AR > AC): abnormal (supernormal) profit = (AR - AC) x Q.
  • P = AC: normal profit only. This is the break-even point: it occurs where MC cuts AC at its minimum, so price = minimum AC and TR = TC.
  • P < AC but P > AVC: loss, but the firm continues because it recovers all variable cost and part of fixed cost; its loss is smaller than the total fixed cost it would lose by closing.
  • P = AVC: the shut-down point, where MC cuts AVC at its minimum. The firm is just indifferent between producing and closing, because the loss equals TFC either way.
  • P < AVC: the firm closes (in the short run), since producing would add to the loss: TR would not cover even variable cost. Its loss is limited to TFC.

4. Short-run supply curve. The part of the firm's MC curve above the minimum AVC (shut-down point) is its short-run supply curve.

5. Long-run equilibrium (no diagram required). Free entry and exit remove abnormal profit and losses in the long run. If firms earn abnormal profit, new firms enter, industry supply rises and price falls; if firms suffer losses, some exit, supply falls and price rises. The long-run equilibrium therefore has P = MR = MC = minimum long-run AC: each firm earns only normal profit and produces at the lowest point of its average cost curve, at the optimum scale. (The long-run diagram is not required.)

Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points: key facts

Firm's revenue
AR = MR = P (price taker)
Short-run equilibrium
P = MR = MC, MC rising
Break-even
P = minimum AC, TR = TC, normal profit
Shut-down point
P = minimum AVC; shut down if P < AVC
Profit
Profit = (P - AC) x Q

How to answer Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points questions

Given a cost table and a price, decide the output, profit and whether the firm should operate.

  1. 1Find the output at which MC equals (or is just below) the price on the rising part of MC.
  2. 2Compute TR = P x Q and TC for that output; profit = TR - TC.
  3. 3Compare P with AC (profit, break-even or loss) and with AVC (continue or shut down).
  4. 4If P is below AVC, compare the loss from producing with TFC: closing loses only TFC.
  5. 5Name the case in the final line.

Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

A tailor deciding whether to stay open

Suppose a tailor in a busy market pays a fixed rent and licence of Rs 60 a day and can sell stitched items at the market price. For 1 to 6 items her variable cost is Rs 20, 36, 48, 64, 90 and 126. She learns the going price has fallen to Rs 12.

Should she keep stitching or close for the day?

Try it first, then show the solutionSolution
  1. Her lowest average variable cost is Rs 16 (at 3 or 4 items), which is above the price of Rs 12.
  2. If she stitched 3 items: TR = 36, TC = 60 + 48 = 108, loss = Rs 72.
  3. If she closes: loss = fixed cost Rs 60.

Answer: She should close for the day: staying open loses Rs 72 against Rs 60 from closing, because the price of Rs 12 is below the minimum average variable cost of Rs 16.

Memory hook: If sales cannot cover the running cost, shut.

Tricks to remember Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points

Short memory aids. Say each one aloud once, then use it on a question the same day.

  • Break-even at minimum AC; shut-down at minimum AVC

    Two minimum points: AC min = no profit, no loss; AVC min = last chance before closing.

    Use it when: Locating the points on a diagram.

  • Between the two, stay

    Price between min AVC and min AC: loss but carry on, as fixed cost is sunk.

    Use it when: Decision questions.

  • Long run: zero abnormal profit

    Entry and exit nudge the price to min AC.

    Use it when: Long-run question.

Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Short-run supply curve · 1 mark · MCQBoard level

The short-run supply curve of a perfectly competitive firm is the part of its marginal cost curve that lies above the:
(a) minimum point of AC
(b) minimum point of AVC
(c) AFC curve
(d) AR curve

Try it first, then show the solutionSolution
  1. Below minimum AVC the firm shuts down and supplies nothing, so supply starts at the shut-down point, the minimum of AVC.

Answer: (b) minimum point of AVC

Example 2: Equilibrium and result at a given price · 3 marks · Short answerBoard level

A firm has TFC = Rs 60 and TVC for 1 to 6 units of Rs 20, 36, 48, 64, 90 and 126 (MC = 20, 16, 12, 16, 26, 36). The market price is Rs 26. Find the equilibrium output, profit or loss, and say whether the firm should continue. (3 marks)

Try it first, then show the solutionSolution
  1. MC = price (Rs 26) at the 5th unit on the rising part of MC.
  2. TR = 26 x 5 = Rs 130. TC = 60 + 90 = Rs 150. Loss = Rs 20.
  3. AVC at 5 units = 90/5 = Rs 18 < price Rs 26, so variable cost is covered; the loss (Rs 20) is smaller than the fixed cost (Rs 60).
  4. The firm continues.

Answer: Equilibrium output 5 units, loss Rs 20 (price below AC of Rs 30 but above AVC of Rs 18): the firm continues in the short run.

Example 3: Shut-down decision · 4 marks · Short answerHarder board level

For the same firm the price falls to Rs 12. Minimum AVC is Rs 16. Show whether the firm should produce or close, comparing the losses. (4 marks)

Try it first, then show the solutionSolution
  1. Price Rs 12 is below the minimum AVC of Rs 16, so no output level gives price above AVC.
  2. If it produced 3 units (MC lowest): TR = 36; TC = 60 + 48 = 108; loss = Rs 72.
  3. If it closes, the loss equals TFC = Rs 60.
  4. Rs 60 < Rs 72, so closing is better.

Answer: The firm shuts down: its loss is limited to Rs 60 (fixed cost) instead of Rs 72.

Example 4: Break-even and abnormal profit · 4 marks · Short answerHarder board level

For the same firm, find the output, TR, TC and profit at (a) a price of Rs 30 and (b) a price of Rs 36. Name the case in each. (4 marks)

Try it first, then show the solutionSolution
  1. (a) MC = 26 at 5 units (MC of the 6th = 36 > 30), so output = 5. TR = 150, TC = 150, profit = 0. AC = 30 = price: break-even point (minimum AC).
  2. (b) MC of the 6th unit = 36 = price, so output = 6. TR = 36 x 6 = 216. TC = 60 + 126 = 186. Profit = Rs 30 (price 36 > AC 31): abnormal profit.

Answer: (a) Output 5, profit zero: break-even. (b) Output 6, profit Rs 30: abnormal profit.

Example 5: Long-run adjustment · 4 marks · Short answerHOTS / competency

Suppose 100 identical firms each earn Rs 30 at the price of Rs 36 (each producing 6 units). Market demand is 600 units at Rs 36 and, assume, 750 units at Rs 30. Describe the adjustment to the long run and find the number of firms at Rs 30. (4 marks)

Try it first, then show the solutionSolution
  1. Total abnormal profit = 100 x 30 = Rs 3,000, which attracts new firms (free entry).
  2. Entry raises industry supply, so price falls. Each firm moves down its MC curve: output per firm falls from 6 to 5 as price falls to Rs 30.
  3. At Rs 30 each firm earns only normal profit (price = minimum AC).
  4. Number of firms = 750 / 5 = 150, so 50 new firms enter.

Answer: Price falls to Rs 30 = minimum AC; abnormal profit disappears; 150 firms each produce 5 units (50 firms have entered).

Where students lose marks in Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points

The slips examiners see most often, and what to write instead.

  • Mistake: Using the wrong cost for the shut-down point

    Comparing price with AC.

    Wrong working

    Firm shuts down whenever price < AC.

    Right working

    Short-run shut down when price < minimum AVC; between min AVC and min AC it continues at a loss.

    Do this: Link the shut-down point to AVC.

    Usually costs: 2 marks.

  • Mistake: Equilibrium on a falling part of MC

    Missing the second condition.

    Wrong working

    At Rs 20, equilibrium at the 1st unit where MC = 20.

    Right working

    MC must be rising: the equilibrium is where MC cuts MR from below, at the 4th unit.

    Do this: Check that MC at the next unit is higher.

    Usually costs: 1-2 marks.

  • Mistake: Profit by AR - MC

    Wrong formula.

    Wrong working

    Profit per unit = 26 - 26 = 0.

    Right working

    Profit = TR - TC = (P - AC) x Q.

    Do this: Use AC for profit, MC for the output decision.

    Usually costs: 1-2 marks.

  • Mistake: Saying loss means shutting down

    Ignoring fixed cost.

    Wrong working

    Loss of Rs 20 so the firm closes.

    Right working

    The loss of Rs 20 is less than TFC of Rs 60, so it continues.

    Do this: Compare the loss with fixed cost.

    Usually costs: 2 marks.

Exam tips

  • Draw the firm diagram with MC, AC, AVC, AR = MR and mark the break-even point (min AC) and shut-down point (min AVC).
  • In the short run the firm may earn abnormal profit, normal profit or a loss; draw three small diagrams.
  • State the two conditions of equilibrium every time (MC = MR and MC cuts MR from below).
  • The long-run diagram is not required; explain the entry and exit process in words.
  • Learn the features of each market form as 'meaning only' one-liners.

Practice questions on Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

  1. Q1 · 1 mark · MCQBoard level

    At the break-even point of a perfectly competitive firm in the short run:
    (a) price equals minimum AVC
    (b) price equals minimum AC
    (c) price exceeds AC
    (d) MR exceeds MC

    Hint

    Normal profit only.

    Answer

    (b) price equals minimum AC

  2. Q2 · 3 marks · Short answerBoard level

    Using TFC = Rs 60 and TVC for 1 to 6 units of Rs 20, 36, 48, 64, 90 and 126, find the output and result when the price is Rs 20. (3 marks)

    Hint

    MC = 20, 16, 12, 16, 26, 36; use the rising part.

    Answer

    MC (rising) is Rs 16 at the 4th unit and Rs 26 at the 5th, so with price Rs 20 the output is 4. TR = 80, TC = 60 + 64 = 124, loss = Rs 44. AVC = 16 < 20 and loss < TFC (Rs 60), so the firm continues.

  3. Q3 · 4 marks · Short answerHarder board level

    For the same firm (minimum AVC Rs 16, minimum AC Rs 30), classify the position and give the output and profit or loss at prices of Rs 15, Rs 18, Rs 25 and Rs 32. (4 marks)

    Hint

    Compare each price with min AVC and min AC.

    Answer

    Rs 15 (below min AVC): shut down, loss = TFC Rs 60 (producing 4 units would lose 124 - 60 = Rs 64). Rs 18: output 4, TR 72, TC 124, loss Rs 52 (< 60): continues. Rs 25: output 4, TR 100, loss Rs 24: continues. Rs 32: output 5, TR 160, TC 150, abnormal profit Rs 10.

  4. Q4 · 4 marks · Short answerHarder board level

    State the price ranges for the same firm in which it (a) earns abnormal profit, (b) breaks even, (c) makes a loss but continues, (d) shuts down. (4 marks)

    Hint

    Use the two minimum points.

    Answer

    (a) Price above Rs 30 (above minimum AC). (b) Price = Rs 30 (minimum AC; TR = TC = Rs 150 at 5 units). (c) Price between Rs 16 and Rs 30 (above minimum AVC but below minimum AC). (d) Price below Rs 16 (below minimum AVC).

  5. Q5 · 3 marks · Short answerHOTS / competency

    At a price of Rs 18 the firm sells 4 units and has AVC = Rs 16 at that output. Show that it covers all its variable cost, how much it contributes to fixed cost, and why this makes continuing better than closing. (3 marks)

    Hint

    TR minus TVC is the contribution.

    Answer

    TR = 18 x 4 = 72; TVC = 16 x 4 = 64. Contribution to fixed cost = 72 - 64 = Rs 8. If it closed it would lose all of TFC (Rs 60); by producing it loses only 60 - 8 = Rs 52. Hence a loss-making firm with price above AVC prefers to continue.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

  1. 1.Demand curve of a competitive firm?Show answer

    Horizontal at the market price (AR = MR = P).

  2. 2.Break-even price?Show answer

    Minimum average cost.

  3. 3.Shut-down price?Show answer

    Minimum average variable cost.

  4. 4.What kind of profit is left once entry and exit are complete?Show answer

    Normal profit only.

  5. 5.Which part of MC is the short-run supply curve?Show answer

    The part above minimum AVC.

Short-Run Equilibrium of a Perfectly Competitive Firm: Break-Even and Shut-Down Points: frequently asked questions

What are the conditions for a firm's equilibrium under perfect competition?

MC = MR (= price) and MC cuts MR from below.

What is the shut-down point?

The price equal to minimum AVC, below which the firm stops producing in the short run.

What is the break-even point?

The point where price equals AC, TR equals TC and the firm earns normal profit.

Why is there no abnormal profit in the long run?

Free entry and exit push the price to minimum AC.