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7. The price system and the microeconomy

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  1. 7.1 Utility

    1. 7.1.1Total and marginal utility

      • Definition and calculation of total utility and marginal utility

    2. 7.1.2Diminishing marginal utility

      • Diminishing marginal utility

    3. 7.1.3Equi-marginal principle

      • Equi-marginal principle

    4. 7.1.4Individual demand curve derivation

      • Derivation of an individual demand curve

    5. 7.1.5Limits of marginal utility theory

      • Limitations of marginal utility theory and its assumptions of rational behaviour

  2. 7.2 Indifference curves and budget lines

    1. 7.2.1Indifference curves and budget lines

      • Meaning of an indifference curve and a budget line

    2. 7.2.2Budget line shifts

      • Causes of a shift in the budget line

    3. 7.2.3Income, substitution and price effects

      • Income, substitution and price effects for normal, inferior and Giffen goods

    4. 7.2.4Limits of indifference curve model

      • Limitations of the model of indifference curves

  3. 7.3 Efficiency and market failure

    1. 7.3.1Productive and allocative efficiency

      • Definitions of productive efficiency and allocative efficiency

    2. 7.3.2Efficiency conditions

      • Conditions for productive efficiency and allocative efficiency

    3. 7.3.3Pareto optimality

      • Pareto optimality

    4. 7.3.4Dynamic efficiency

      • Definition of dynamic efficiency

    5. 7.3.5Market failure

      • Definition of market failure

    6. 7.3.6Reasons for market failure

      • Reasons for market failure

  4. 7.4 Private costs and benefits, externalities and social costs and benefits

    1. 7.4.1Social costs

      • Definition and calculation of social costs (SC) as the sum of private costs (PC) and external costs (MEC)

    2. 7.4.2Social benefits

      • Definition and calculation of social benefits (SB) as the sum of private benefits (PB) and external external benefits (MEB)

    3. 7.4.3Positive and negative externalities

      • Definition of positive externality and negative externality

    4. 7.4.4Externalities in consumption/production

      • Positive and negative externalities of both consumption and production

    5. 7.4.5Deadweight welfare loss

      • Deadweight welfare losses arising from positive and negative externalities

    6. 7.4.6Asymmetric information and moral hazard

      • Asymmetric information and moral hazard

    7. 7.4.7Costs/benefits in decision analysis

      • Use of costs and benefits in analysing decisions (knowledge of net present value is not required)

  5. 7.5 Types of cost, revenue and profit, short-run and long-run production

    1. 7.5.1Short-run production function

      • Short-run production function: - fixed and variable factors of production - definition and calculation of total product, average product and marginal product - law of diminishing returns (law of variable proportions)

    2. 7.5.2Short-run cost function

      • Short-run cost function: - definition and calculation of fixed costs (FC) and variable costs (VC) - definition and calculation of total, average and marginal costs (TC, AC, MC), including average (TVC, AVC) - explanation of shape of short-run average cost and marginal cost curves

    3. 7.5.3Long-run production function

      • Long-run production function: - no fixed factors of production - returns to scale

    4. 7.5.4Long-run cost function

      • Long-run cost function: - explanation of shape of long-run average cost curve - concept of minimum efficient scale

    5. 7.5.5Economies of scale and average cost

      • Relationship between economies of scale and decreasing average costs

    6. 7.5.6Economies of scale

      • Internal and external economies of scale

    7. 7.5.7Diseconomies of scale

      • Internal and external diseconomies of scale

    8. 7.5.8Revenue

      • Definition and calculation of revenue: total, average and marginal revenue (TR, AR, MR)

    9. 7.5.9Types of profit

      • Definition of normal, subnormal and supernormal profit

    10. 7.5.10Profit calculations

      • Calculation of supernormal and subnormal profit

  6. 7.6 Different market structures

    1. 7.6.1Market structures

      • Perfect competition and imperfect competition: monopoly, monopolistic competition, oligopoly, natural monopoly

    2. 7.6.2Market structure features

      • Structure of the listed markets as explained by number of buyers and sellers, product differentiation, degree of freedom of entry and availability of information

    3. 7.6.3Barriers to entry/exit

      • Barriers to entry and exit: - legal barriers - market barriers - cost barriers - physical barriers

    4. 7.6.4Firm performance by market structure

      • Performance of firms in different market structures: - revenues and revenue curves - output in the short run and the long run - profits in the short run and the long run - shutdown price in the short run and the long run - derivation of a firm's supply curve in a perfectly competitive market - efficiency and X-inefficiency in the short run and the long run - contestable markets: features and implications - price competition and non-price competition - collusion and the Prisoner's Dilemma in oligopolistic markets, including a two-player pay-off matrix

    5. 7.6.5Concentration ratio

      • Definition and calculation of the concentration ratio

  7. 7.7 Growth and survival of firms

    1. 7.7.1Firm size

      • Reasons for different sizes of firms

    2. 7.7.2Internal growth

      • Internal growth of firms: organic growth and diversification

    3. 7.7.3External growth and integration

      • External growth of firms - integration (mergers and takeovers): - methods of integration: - horizontal - vertical (forwards and backwards) - conglomerate - reasons for integration - consequences of integration

    4. 7.7.4Cartels

      • Cartels: - conditions for an effective cartel - consequences of a cartel

    5. 7.7.5Principal-agent problem

      • Principal-agent problem arising from differing objectives of shareholders/owners and managers

  8. 7.8 Differing objectives and policies of firms

    1. 7.8.1Profit maximisation

      • Traditional profit-maximising objective of firms

    2. 7.8.2Alternative firm objectives

      • An understanding of other objectives of firms: - survival - profit satisficing - sales maximisation - revenue maximisation

    3. 7.8.3Price discrimination

      • Price discrimination - first, second and third degree: - conditions for effective price discrimination - consequences of price discrimination

    4. 7.8.4Pricing policies

      • Other pricing policies: - limit pricing - predatory pricing - price leadership

    5. 7.8.5PED and firm revenue

      • Relationship between price elasticity of demand and a firm's revenue: - in a normal downward sloping demand curve - in a kinked demand curve