Cambridge International as and a level Economics Ebook

Scarcity and choice, the margin and change: 
Using 
indiff erence curves and budget lines, the income and 
substitution eff ects of a price change are very relevant 
examples of how decision making by individuals is based 
on choices at the margin.
KEY CONCEPT LINK
TOP TIP
Budget lines and indiff erence curves assume we are 
dealing with rational consumers; the reality is that this is 
not necessarily true for many consumers.
Types of cost, revenue and 
profit, short-run and long-run 
production
Introduction to production
In 
Chapter 1
four factors of production were identifi ed. 
Th
ese were land, labour, capital and enterprise. In all cases, 
the demand for these factors of production comes from a 
producer who wishes to use them to make various goods 
or products. Th
e producer is normally a business whose 
demand for factors of production is derived from the 
needs of its operations. Let us take the case of a clothing 
manufacturer to elaborate this important point.
As a consequence of globalisation, many items of 
clothing are now produced in the developing economies 
of South East Asia, North Africa and Central Europe. 
Designer labels, such as Nike, Calvin Klein, Ralph Lauren, 
Lacoste and Dolce & Gabbana are no longer produced in 
the home country of their corporate producer. Producers 
need all the factors of production in order to make goods 
for sale in markets that are mainly in developed economies. 
Th
eir task is to combine the factors of production in an 
eff ective way to be effi
cient, competitive and profi table 
in the world market. Th
e most important decision they 
Figure 7.4 
The income and substitution eff ects of a price change
Quantity of good A
Income effect
substitution effect
Quantity of good B
0
E
3
E
2
B
1
B
2
E
1
I
1
I
2
Income
effect
substitution
effect