Cambridge International as and a level Economics Ebook

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Introduction
Th
is chapter builds upon and develops the content of 
Chapter 2
 (AS Level). More specifi cally, it extends the 
description of how markets work to explain in more detail 
how consumers make choices at the margin Th
e chapter also:
■ 
explains how firms make decisions on how much they 
should produce at the margin
■ 
analyses how firms behave in terms of setting prices and 
output in diff erent market structures
■ 
discusses the extent to which firms operate in an eff icient 
way in these market structures.
Utility and marginal utility
Economists have long been interested in the way that 
consumers behave. Aspects of demand theory were 
introduced earlier in 
Chapter 2.
For the demand curve, it 
was assumed that it could be derived from data collected 
for the demand schedule. Here we shall look behind the 
demand curve and explore why it really is the case that 
consumers buy more of a good when its price falls.
A relevant starting point is the notion of 
utility
. Th
is 
idea dates back to the nineteenth century and is a term 
used to record the level of happiness or satisfaction that 
someone receives from the consumption of a good. Th
e 
concept assumes that this satisfaction can be measured, 
in the same way that the actual units consumed can be 
calculated. Two important measures are:
■ 
total utility 
– the overall satisfaction that is derived 
from the consumption of all units of a good over a given 
time period
■ 
marginal utility
– the additional utility derived from the 
consumption of one more unit of a particular good. So, if 
someone gets ten units of satisfaction from consuming one 
bar of chocolate and 15 units aft er consuming two bars, 
then the marginal utility is five units.