BREAK-EVEN POINT.

PRODUCER
AND CONSUMER SURPLUS.
SESSION 5
By Elvira Hernández Benito
SESSION PLANING
 Explanation of: Break-Even Point.
 Exercises.
 Questions.

 Explanation of: Consumer and Producer Surplus.

 Exercises.
 Questions.
 Group work.

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
BREAK-EVEN POINT.

Analysis:

The Break-Even Point for a good takes place when the total revenue is equal to the total cost (that means the
point in which there is no profit and no loss).

Break-Even Point: TR = TC

The Break- Even Point is algebraically solved by equating total revenue and total cost equations, and

graphically as the point in common for both revenue and cost functions.

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
EXERCISE 1
4. The total revenue and total cost functions are given as follows:

TR = 3Q

TC = 10 + 2Q

a. Calculate the equilibrium quantity algebraically and graphically at the Break-Even Point.

b. Calculate the value of total revenue and total cost at the Break-Even Point.

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
 SOLUTION
a) Algebraically, at Break-Even Point

TR = TC

then 3Q = 10 + 2Q
3Q – 2Q = 10
Q = 10

This is the quantity at Break-Even Point (when TR=TC)

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
b) Graphically

Total Revenue:

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
Total Costs:

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
Break-Even point when Total Revenue = Total Costs

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
Break-Even point when Total Revenue = Total Costs

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
 EXERCISE 2

A group entrepreneurs set up a company to specialise in house renovation (including insulation)

services. Their monthly fixed costs are €240 thousand and variable costs of €4 thousand to renovate an

‘average’ house. The company charges €20 thousand to renovate an ‘average house.

a) Write down the equation for the company’s (i) total cost (ii) total revenue functions

b) Plot the total cost and total revenue on the same diagram. Hence state the break-even price and

quantity. Confirm your answer algebraically.

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
 SOLUTION
a) Total Costs:
TC =240 + 4Q

Total Revenue:
TR = 20Q

Q -20 -10 0 10 15 20 30 40
b) Graphically: TC =240 + 4Q 160 200 240 280 300 320 360 400
TR = 20Q -400 -200 0 200 300 400 600 800

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
CONSUMER AND PRODUCER SURPLUS.

• Consumer surplus: This is the difference between the maximum price a consumer is willing to pay and the
actual price they pay (or equilibrium price). If a consumer would be willing to pay more than the current
asking price, then they are getting more benefit from the purchased product than they initially paid. It is
shown graphically as the area below the demand curve and above the equilibrium price.

• Producer surplus: This is a difference between how much of a good the producer is willing to supply
versus how much he receives in the trade. The difference or surplus amount is the benefit the producer
receives for selling the good in the market. A producer surplus is generated by market prices in excess of
the lowest price producers would otherwise be willing to accept for their goods. Producer surplus is a
measure of producer welfare. It is shown graphically as the area above the supply curve and below the
equilibrium price.
 

• Total surplus: This is the sum of consumer and producer surplus.

Applied Business Mathematics
Elvira Hernández Benito
Academic Year 20-21
EXERCISE 1
The demand and supply functions for front stalls concert tickets is given by the equations

P = 400 – 4Q and P = 40 + 5Q respectively

where P is the price per ticket and Q is the number of tickets (quantity).

a) Calculate the equilibrium price and quantity.

b) Plot the demand and supply functions on the same diagram.

c) From the diagram calculate, geometrically:

i) the consumer’s surplus

ii) the producer’s surplus.

Applied Business Mathematics
Elvira Hernández Benito
Academic Year 20-21
SOLUTION
a) Equilibrium price and quantity:

At equilibrium Ps = Pd, then:

400 – 4Q = 40 + 5Q
400 – 40 = 5Q + 4Q
360 = 9Q
Q = 40
And:
P = 400 – 4*40
P = 240

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
b) Graphically:
Q -20 -10 0 10 20 30 40 50 60 70 80
Ps =40 + 5Q -60 -10 40 90 140 190 240 290 340 390 440
Pd =400 - 4Q 480 440 400 360 320 280 240 200 160 120 80

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
c) Consumer and producer surplus:

CS = (400- 240) x 40
2

CS = 3200
(the extra gratification if they bought the product to a price smaller than the market one –equilibrium price-)

(240- 40) x 40
PS =
2

PS = 4000
(the monetary gratification if they sold the product to a price bigger than the market one –equilibrium price-)

And:
TS = 7200

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
 EXERCISE 2 (proposed)
The demand and supply functions for a product are:

Demand function: Pd = 200- 4Q

Supply function: Ps = 50 + Q

a) Find the equilibrium price and quantity.

b) Plot both functions. Illustrate graphically the consumer surplus (CS) and producer surplus (PS) at equilibrium.

c) Calculate the consumer surplus at equilibrium.

d) Calculate the producer surplus at equilibrium.

e) Calculate the total surplus at equilibrium.

Applied Business Mathematics

Elvira Hernández Benito
Academic Year 20-21
SOLUTION
a) The equilibrium price and quantity:
P = 80 and Q = 30

b)

c) CS = 1800
e) TS = 2250
d) PS = 450 Applied Business Mathematics
Elvira Hernández Benito
Academic Year 20-21