then the firm should be able to identify values of revenue and cost associated with each
level of output and in so doing identify a profit-maximising position.
Figure 5.15a shows a total revenue and total cost curve for a given product. The
demand curve (AR curve) and marginal revenue curve in Figure 5.15b correspond to the
total revenue curve in Figure 5.15a. The total cost curve in Figure 5.15a is of a traditional
shape, as analysed earlier in this chapter. The corresponding average total and marginal
cost curves are presented in Figure 5.15b.
Look at Figure 5.15a.With output from zero to Q1, then total cost (TC) exceeds total
revenue (TR) and the firm makes a loss. At zero output, the loss is equal to the distance
Oa, representing fixed cost. At Q1 and Q4, TC equals TR and the firm breaks even. (We
discuss below the implication of a firm ‘breaking even’.) Between Q1 and Q4, TR exceeds
TC and the firm earns a profit. Beyond Q4, the firm makes a loss. Figure 5.15a includes a