That mysterious area between the break-even and shutdown points.

Most students tend to find it easy to understand why a business will cease production below the shutdown point and make a profit above the break-even point. But they usually find it difficult to explain why a business will continue production in the short run between these points. Here is a quick activity that lets them discover why for themselves by using an example that they can relate to.

It involves the students making a decision on whether they should rent out an apartment that they have the lease on while they are away for a month. Most are able to make a correct judgement as to when it would and wouldn’t be a good idea, given the nature of the fixed cost (lease payment) and variable cost (electricity). From there, it is only a very short step to explaining how the same principles work for a business!

The pdf file of the activity can be downloaded below.
BE_and_shutdown.pdf