Final answer:
Break-even analysis aims to determine the sales level where a business neither makes a profit nor a loss, with total revenues equaling total costs. This point occurs when the price equals the average cost, and the firm must decide whether to continue production or shut down to minimize losses.
Step-by-step explanation:
The goal of break-even analysis is to find the level of sales where profit is equal to zero, which means that total revenue equals total costs, both variable and fixed. This is the point at which a business is not making a profit, but is also not incurring any losses. When analyzing total revenue and total cost, a perfectly competitive firm will find that total revenue for them is a straight line with a slope that is equal to the price of the good. The total cost curve slopes up and becomes steeper at higher levels of output due to diminishing marginal returns.
According to LibreTexts, at the break-even point, the price is equal to average cost, meaning that if a firm's price is below this point, it will operate at a loss. The firm then must decide whether to continue producing and incurring losses or to shut down operations. The preferable option is the one that results in the least amount of lost money. In the long run, firms benefit from understanding their costs structures and applying this knowledge to the profit-maximizing quantity and pricing strategies.