Cambridge International as and a level Economics Ebook

186
Cambridge International A Level Economics

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kinked demand curve, a clear recognition of the mutual 
interdependence of fi rms.
So, in imperfect competition, fi rms compete with 
others through a mixture of price and non-price 
competition. It is only when there are very close 
substitutes that their conduct becomes less predictable. 
In this way, fi rms are interdependent. Th
e extent to which 
they feel they can take risks with regard to their rivals’ 
responses can lead to a change in a fi rm’s pattern of 
behaviour. Th
e outcome is oft en one of collusion.
Th
e models of market structure make an assumption 
that, whatever the market structure, each fi rm will seek to 
maximise its profi ts all of the time. In reality this is clearly 
not the case. Th
ere is a particularly strong argument 
for relaxing this assumption when investigating how 
oligopolists operate. Alternative motives therefore oft en 
make it diffi
cult to predict the conduct of fi rms in respect 
of price and output.
187
Chapter 7: The price system and the microeconomy 

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In this chapter it has been shown that:
■ 
The principle of diminishing marginal utility can 
be used to explain the shape and derivation of the 
demand curve.
■ 
A consumer will choose a combination of goods 
where the value of the marginal utility divided by the 
price of the good is equal for all goods.
■ 
A price change for a good can be divided into a 
substitution eff ect and an income eff ect.
■ 
In the short run, at least one factor of production is 
fixed; all factors are variable in the long run.
■ 
The short-run production function shows how the 
quantity produced varies with changes to the input of 
a variable factor of production, normally labour.
■ 
The demand for all factors of production is a derived 
demand.
■ 
Economists split a firm’s costs of production into fixed 
and variable costs; marginal and average costs are