Relationship between long-run & short- run average cost curves O Output Cost SRAC 1 SRAC 2 SRAC 3 SRAC 4 SRAC 5 Q0Q0 Q1Q1 Q2Q2 Q3Q3 LRAC

O O P QQ AR,MR (Rs) D S 55 D = AR = MR 2m1m3m m = millions Deriving a firm’s AR & MR curves: ‘price-taking’ firm (a) The market(b) The firm TR at Q = 800 TR at Q = 400 P

TR curve TR Q O

Revenue of a ‘price-making’ firm facing a downward sloping demand curve Q (ships) P = AR Rs. Crores TR Rs. Crores MR Rs. Crores

The market O Q Q1Q1 S D Rs Crores Q2Q2 S` P1P1 P2P2

Q (ships) P = AR Rs. Crores TR Rs. Crores MR Rs. Crores Revenue of a ‘price-making’ firm facing a downward sloping demand curve

MR AR r Inelastic elastic Q X AR, MR Rs. Crores

Є > 1 Є = 1 Є < 1 TR Total revenue for a firm facing a downward sloping demand curve 1357

Q (units) TRTCT π Total revenue and total cost approach to profit maximization

T π TR TC π = Vertical distance between the TC & TR MAX π = 18 – 14 = Q TR, TC Scale on x axis Smooth curves

QP=ARTRMRTCACMC T π A π /3 41 1/ /2 2 1/ ? TABLE

MR e MC Q MR < MC MR > MC Q* MC, MR

MR MC Q Q* AR AR = 6 AC AC= 4 2/3 L T K F Costs, revenue TC = OQTF Π = KLTF TR = OKLQ*

Loss minimizing output O AR MR MC AC Q* Loss AC AR Q Costs, revenue