5- c) Applications of

Functions
 1- Break – Even Analysis

The Break-Even analysis helps producers to identify the level of production

that enables them to cover all their expenses and start making profits.

The break-even point indicates the level of production at which no profit or

loss are realized i.e. the cost and revenue are equal.

This is the level of production greater than which, profit is realized and less
than which there is loss.

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 1- Break – Even Analysis
Define:

: The number of units manufactured and sold (The production level).

: The total cost corresponding to production level .

: The total revenue corresponding to production level .

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 1- Break – Even Analysis
a) The Total Cost Function
= Fixed Cost + Variable Cost

Cost paid even if Cost based on the number

nothing is produced, e.g.
rent, maintenance,
administrative payroll, …
etc.
of produced items ()
=
(Cost of one unit) (number
of units produced)
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 1- Break – Even Analysis
b) The Total Revenue Function

= Price of One Unit Number of Units Sold ().

c) The Profit Function

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 1- Break – Even Analysis

If is a positive value, that is, < R(), then a profit is achieved.

If is a negative value, that is, > , then a loss is achieved.

If is zero, that is, = , then is the Break-Even point.

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 1- Break – Even Analysis
Graphical Representation
C(x)
R(x) R(x)

Break-Even Profit
C(x)

Fixed
Cost
Loss

Break-Even X
Point 7
 1- Break – Even Analysis
Example
A manufacturer sells a certain product for 100 LE per unit. The total fixed cost of
manufacturing this product is equal to 1000 LE. In addition, for each unit, the cost
of the raw materials is 20 LE and the labor cost is 30 LE.

a) How many units must the manufacturer sell to break-even?

b) What is the manufacturer’s profit or loss if 10 and 100 units are sold?
c) How many units must be sold for the manufacturer to get a profit of 1500 LE?

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 1- Break – Even Analysis
SOL
The cost function: C(x) = 1000 + 20x+30x =1000 + 50x,where is the no. of units.
The revenue function: R(x) = 100 x.
The profit function: P(x) = 100x (1000 + 50x) = 50x 1000.

a) To break-even: C(x) = R(x) 1000 + 50x = 100x

1000= 50x x = 20 units.
b) P(10) = 50(10) 1000 = 500 L.E. (Loss)
P(100) = 50(100) 1000 = 4000 L.E. ( Profit)

c) P(x) = 1500 50x 1000 = 1500

50x = 2500 x = 50 units.
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 2- Market Equilibrium Analysis
It is well-known that consumers and producers react oppositely to price
changes.

If the price increases, the consumers lower their demand and the producers
increase their supply.

If the price decreases, the consumers increase their demand and the
producers lower their supply.

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 2- Market Equilibrium Analysis

The price for which the supply and the demand are balanced (equal) is called the
equilibrium price.
The amount demanded and supplied at the equilibrium price is called the
equilibrium quantity.
We refer to the Supply Function as , where is the price.

We refer to the Demand Function as , where is the price.

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 2- Market Equilibrium Analysis
Graphical Representation

𝒑 𝑺(𝒑)
Equilibrium
Equilibrium Point
Price

𝑫(𝒑)
Equilibrium
𝑸
Quantity 12
 2- Market Equilibrium Analysis
Example
Assume that the supply and demand functions for a certain commodity are
given by:

=.

a) Find the equilibrium price.

b) Find the equilibrium quantity.
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 2- Market Equilibrium Analysis
SOL
a) Find the equilibrium price.

= Rejected

. Or .
b) Find the equilibrium quantity.
Substitute in either the demand or supply functions.
.

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