The break-even point (BEP) in economics, business—and specifically cost accounting—is the point at which total cost and total revenue are equal, i.e. "even". In layperson's terms, after all costs are paid for there is neither profit nor loss. In economics specifically, the term has a broader definition; even if there is no net loss or gain, and one has "broken even", opportunity costs have been covered and capital has received the risk-adjusted, expected return. The break-even analysis was developed by Karl Bücher and Johann Friedrich Schär.
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In this Dossier
- ⭐ Core Definition: Break-even (economics)
- Break-even (economics) in the context of Producer surplus
- Break-even (economics) in the context of Payback period
Break-even (economics) in the context of Producer surplus
In mainstream economics, economic surplus, also known as total welfare or total social welfare or Marshallian surplus (after Alfred Marshall), is either of two related quantities:
- Consumer surplus, or consumers' surplus, is the monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to pay.
- Producer surplus, or producers' surplus, is the amount that producers benefit by selling at a market price that is higher than the least that they would be willing to sell for; this is roughly equal to profit (since producers are not normally willing to sell at a loss and are normally indifferent to selling at a break-even price).
The sum of consumer and producer surplus is sometimes known as social surplus or total surplus; a decrease in that total from inefficiencies is called deadweight loss.
View the full Wikipedia page for Producer surplusBreak-even (economics) in the context of Payback period
Payback period in capital budgeting refers to the time required to recoup the funds expended in an investment, or to reach the break-even point.
For example, a $1000 investment made at the start of year 1 which returned $500 at the end of year 1 and year 2 respectively would have a two-year payback period. Payback period is usually expressed in years. Starting from investment year by calculating Net Cash Flow for each year:
View the full Wikipedia page for Payback period