Cambridge International as and a level Economics Ebook

Chapter 6: Basic economic ideas and resource allocation
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Chapter 7:
The price system and the microeconomy
A Level
Learning objectives
On completion of this chapter you should know:
■ 
the law of diminishing marginal utility and its relationship 
to the derivation of an individual demand schedule
■ 
the limitations of marginal utility theory and why 
consumers are not always rational
■ 
how indiff erence curves can be used to represent what 
consumers want
■ 
what a budget line is and how it can be used to show the 
income and substitution eff ects of a price change
■ 
the short-run production function: fixed and variable 
factors of production; total product, average product and 
marginal product
■ 
the law of diminishing returns; average cost, marginal cost
■ 
the long-run production function and returns to scale
■ 
how to explain the shape of the long-run average cost curve
■ 
economies of scale, internal and external; diseconomies 
of scale
■ 
how to define total, average and marginal revenue
■ 
what is meant by normal and abnormal profit
■ 
what is meant by market structure and how it can be 
explained
■ 
the diff erence between perfect and imperfect 
competition
■ 
the market structures of monopoly, monopolistic 
competition, oligopoly and natural monopoly
■ 
what is meant by contestable markets and the 
implications of contestability in a market
■ 
reasons for the growth and survival of small firms
■ 
what is meant by profit maximisation; why there are other 
objectives of firms
■ 
how firms make pricing decisions
■ 
how it is possible to compare the performance 
of firms.