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Relationship between long-run & short-run average cost curvesPowerPoint Presentation

Relationship between long-run & short-run average cost curves

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Relationship between long-run & short-run average cost curves

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Relationship between long-run & short-run average cost curves

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SRAC5

SRAC1

SRAC4

SRAC2

SRAC3

LRAC

Cost

O

Q0

Q1

Q2

Q3

Output

Deriving a firm’s 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

Q

O

Q

O

200

400

600

800

1000

1200

1m

2m

3m

m = millions

TR

TR

4000

2000

Q

O

400

800

6

4

2

0

-2

-4

Rs Crores

S

S`

P1

P2

D

O

Q1

Q2

Q

6

4

2

0

-2

-4

elastic

r

Inelastic

AR , MR Rs. Crores

AR

X

Q

MR

Є = 1

Є > 1

Є < 1

TR

1

3

5

7

Total revenue and total cost approach to profit maximization

Scale on x axis

Smooth curves

π = Vertical distance

between the TC & TR

TR, TC

TC

MAX π = 18 – 14 = 4

18

TR

14

Q

T π

TABLE

4

8

2

6

2

4

4

2

7

0

11

-2

20

-4

MC

MR > MC

MC, MR

e

MR < MC

Q

Q*

MR

MC

TR = OKLQ*

Costs, revenue

AC

K

L

AR = 6

F

T

AC= 42/3

AR

Q

Q*

Π = KLTF

TC = OQTF

MR

Costs, revenue

MC

AC

AC

Loss

AR

AR

Q

O

Q*

MR