Relationship between long-run

1
Relationship between long-run short-run
average cost curves
SRAC5
SRAC1
SRAC4
SRAC2
SRAC3
LRAC
Cost
O
Q0
Q1
Q2
Q3
Output
2
Deriving a firms AR MR curves price-taking
firm
(a) The market
(b) The firm
P
P
TR at Q 800
S
AR,MR (Rs)
TR at Q 400
D AR MR
5
5
D
O
Q
Q
O
200
400
600
800
1000
1200
2m
1m
3m
m millions
3
TR curve
TR
TR
4000
2000
Q
O
400
800
4
Revenue of a price-making firm facing a
downward sloping demand curve
Q (ships) P AR Rs. Crores TR Rs. Crores MR Rs. Crores
1 8 8
2 7 14
3 6 18
4 5 20
5 4 20
6 3 18
7 2 14
6
4
2
0
-2
-4
5
The market
Rs Crores
S
S
P1
P2
D
O
Q1
Q2
Q
6
Revenue of a price-making firm facing a
downward sloping demand curve
Q (ships) P AR Rs. Crores TR Rs. Crores MR Rs. Crores
1 8 8
2 7 14
3 6 18
4 5 20
5 4 20
6 3 18
7 2 14
6
4
2
0
-2
-4
7
elastic
r
Inelastic
AR , MR Rs. Crores
AR
X
Q
MR
8
Total revenue for a firm facing a downward
sloping demand curve
? 1
? gt 1
? lt 1
TR
1
3
5
7
9
Total revenue and total cost approach to profit
maximization
Q (units) TR TC T p
0 0 6 -6
1 8 10 -2
2 14 12 2
3 18 14 4
4 20 18 2
5 20 25 -5
6 18 36 -18
7 14 56 -42
10
Scale on x axis Smooth curves
p Vertical distance between the TC TR
TR, TC
TC
MAX p 18 14 4
18
TR
14
Q
T p
11
TABLE
Q PAR TR MR TC AC MC T p A p
0 9 0 6 -6
1 8 8 10 10 -2 -2
2 7 14 12 6 2 1
3 6 18 14 4 2/3 4 1 1/3
4 5 20 18 4 1/2 2 1/2
5 4 20 25 5 -5 -1
6 3 18 36 ? -18 -3
7 2 14 56 8 -42 -6
4
8
2
6
2
4
4
2
7
0
11
-2
20
-4
12
MC
MR gt MC
MC, MR
e
MR lt MC
Q
Q
MR
13
MC
TR OKLQ
Costs, revenue
AC
K
L
AR 6
F
T
AC 42/3
AR
Q
Q
TC OQTF
? KLTF
MR
14
Loss minimizing output
Costs, revenue
MC
AC
AC
Loss
AR
AR
Q
O
Q
MR