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You are here: A-Level Economics Price System-Theory of firm

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theory of firm

Topics Covered (As per CIE Economics Syllabus code 9708)

(a) Individual demand curves
(b) Aggregation of individual demand curves to give market demand
(c) Factors influencing demand
(d) Movements along and shifts of a demand curve
(e) Price, income and cross- elasticities of demand

  • Meaning and calculation
  • Factors affecting
  • Implications for revenue and business decisions

(f) Firms’ supply curves
Aggregation of individual firms’ supply curves to give market supply
(g) Factors influencing market supply, including indirect taxes and subsidies
Movements along and shifts of a supply curve
(h) Price elasticity of supply: determinants, implications for speed/ease with which businesses react to changed market conditions
(i) Interaction of demand and supply: equilibrium price and quantity

  • Meaning of equilibrium and disequilibrium
  • Effects of changes in supply and demand on equilibrium price and quantity
  • Applications of demand and supply analysis

(j) Consumer surplus
(k) Prices as rationing and allocative mechanisms

(a) Law of Diminishing Marginal Utility and its relationship to derivation of an individual demand schedule and curve
Equi-marginal principle
Limitations of marginal utility theory
(b) Budget lines
Income and substitution effects of a price change.
(c) Short-run production function: fixed and variable factors of production, total product, average product and marginal product
Law of diminishing returns (Law of variable proportions)
(d) Demand for labour:
meaning and factors affecting demand for labour
derivation of individual firm’s demand for a factor using marginal
revenue product theory
(e) Supply of labour – meaning and factors affecting supply
Net advantages and the long-run supply of labour
(f) Wage determination under free market forces (competitive product and factor markets)
The role of trade unions and government in wage determination
Wage differentials and economic rent
(g) Long-run production function
Returns to scale
(h) Economist’s versus accountant’s definition of costs
Marginal cost and average cost
Short-run cost function – fixed costs versus variable costs
Explanation of shape of SRAC
(i) Long-run cost function
Explanation of shape of LRAC
Relationship between economies of scale and decreasing costs
Internal and external economies of scale
(j) Survival of small firms
Growth of firms
(k) Relationship between elasticity, marginal, average and total revenue for a downward-sloping demand curve
(l) Concepts of firm and industry
(m) Traditional objective of firm – profit maximisation
Normal and abnormal profit
An awareness of other objectives of firm
(n) Different market structures – perfect competition, monopoly, monopolistic, competition, oligopoly
Structure of markets as explained by number of buyers and sellers,
nature of product, degree of freedom of entry and nature of information
Contestable markets
(o) Conduct of firms – pricing policy and non-price policy, including price discrimination, price leadership models and mutual interdependence in the case of oligopolies

(p) Performance of firms – in terms of output, profits and efficiency

Comparisons with regard to economic efficiency, barriers to entry, price competition, non-price competition and collusion

  • Revision Notes ( 42 Articles )
  • Interactive quizzes ( 6 Articles )

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