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Economic Theory

resources to an alternative use. If a landowner can rent his land to someone
else for a higher price, he will. He has to be paid the opportunity cost of
the land. If Joe can earn more money as a waiter rather than as a host, he
will choose to become a waiter unless he is paid the opportunity cost of

staying a host.
The cost of capital is also an opportunity cost. Capital is usually

acquired through loans and sale of ownership. The cost of debt is the
interest paid on the debt. Remember that every choice has an opportunity
cost and an opportunity benefit.
Businesses are no exception to this rule. Like individuals, businesses

have to make decisions based on costs and benefits.

3. Break-Even Point

In economics and business, specifically cost accounting, the break-
even point (BEP) is the point at which cost or expenses and revenue are
equal: there is no net loss or gain, and one has "broken even." A profit or a

loss has not been made, although opportunity costs have been "paid" and
capital has received the risk-adjusted, expected return. In other words, it´s
the point in which the total revenue of a business exceed its total costs, and
the business begins to create wealth instead of consuming it. It is shown

graphically as the point where the total revenue and total cost curves meet.
In the linear case the break-even point is equal to the fixed costs divided
by the contribution margin per unit.

The break-even point is achieved when the generated profits match the
total costs accumulated till the date of profit generation. Establishing the
break-even point helps businesses in setting plans for the levels of

production which it needs to maintain be profitable.

4. Forms of Market and Price Determination

In general, the word ‘market’ refers to a place or an area where buyers
and sellers generally meet so as to buy and sell a particular commodity. In
Economics, we make use of the term ‘market’ in a different sense. It refers to

a particular commodity that is sold and purchased rather than a place or an
area. For example, cotton market, tea market etc. Any effective arrangement
for bringing buyers and sellers into contact with one another is defined as a
market in economics. The essentials of a market are the following:

1. Market does not confine to a particular place but the whole area
wherein buyers and sellers of a are spread over.

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