Break even relates to situations where a firm covers all of its costs, but generates no profit. In other words, revenues equal costs. Decision makers first need to know their break-even point to decide whether to enter a market or not. Secondly, they should optimize their strategy to lower the break-even point. This often allows for higher returns at lower risk.
- Break even relates to a situation…where a firm covers all of its costs,…but generates no profit. In other words,…break even is when revenues equal costs.…While this formula seems simple enough,…a profound understanding of break even analysis…is at the heart of many economic decisions.…So let's see how to calculate the break even point,…and to identify a break even point…in the revenue-costs diagram.…To better understand the concept, let me share with you…my first entrepreneurial adventure.…
So I'm a kid of the '80s and while in high school,…my friends and I watched Flashdance and listened to Madonna,…and we had the idea to organize a mobile disco.…Saturday after Saturday, very much to the discontent…of our parents, we would rent the concert hall,…light shows, sound system, and engage a DJ.…We sold tickets for nine francs.…Of course, at that age, the big question for us…was not whether we broke even, but whether the girl…we liked would show up. But for the purpose of this course,…let's focus on the questions of profit.…
- What are customers buying? (demand theory)
- What should we produce? (production theory)
- Which costs do I need to worry about now? (cost theory)
- What market am I in? (competition theory)
- What should we charge for it? (pricing theory)
To understand what managerial economics looks like in practice, Stefan explains how Google's auction-based advertising system employs the principles of game theory and how understanding this can help decision makers to outmaneuver their competitors.
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- Using economics to solve business problems
- Understanding price elasticity
- Demand curve shifts
- Economics of scale vs. scope
- Break-even and what-if analysis
- Profit maximization
- Economics in action