CFA Level 1 - Economics - Learning Objective 学习笔记整理

Economics

1. TOPICS IN DEMAND AND SUPPLY ANALYSIS

LOS: Calculate and interpret price, income, and cross-price elasticities of demand and describe factors that affect each measure.

Elasticity is how a variale changes in relation to another :

1. Price Elasticity = Change in quantity demanded / Change in price
   • Goods go on sale => buy more goods

• Formula for Price Elasticity:
• Elasticity > 1 is elastic.
• Elasticity < 1 is inelastic.
• Elasticity = 1 is called unitary elasticity.
  • Elasticity is in absolute values; elasticity can be positive or negative.

Example
A shift of the supply curve of Brent crude oil raises the price from $95 a barrel to $110 a barrel. The quantity demanded frops from 20 million to 18 million barrels a day. The price elasticity of demand for oil is closest to:

2. Income Elasticity = Change in quantity demanded / Change in income

   • Get a big raise => buy more goods
   • Formula for Income Elasticity:
     
     Example:
     A local luxury car dealership gathers that when the average real income of its consumers increases from $50000 to $60000, the demand for its cars increases from 6000 units to 8000 units.
     The income elasticity of demand for such cars is closest to :
     

3. Cross-price Elasticity = Change in quantity demanded good X / change in price of complement or substitute good Y.

   • Mostly found in goods with substitutes and complements.
   • Meat prices go up => buy more fish
     
     Example
     25000 passengeers use Airline A every day when Airline B is chrging $500 per ticket for the same trip. When B increases the cost of each ticket to $650, the demand for Airline A shoots up to 30000 passengers. The cross-price elasticity of demand for Airline A with respect to B is closest to :
     

LOS: Compare substitution and income effects.

Substitution Effect:

• A price increase in one good causes increased demand in a substitute goods.
  • If price of steak goes up, demand for chicken rises and steak falls.

Income Effect:

• Increases in income cause increased demand in normal goods.
  • If income goes up, demand for meat rises.

LOS: Distinguish between normal goods and inferior goods.

Normal goods are goods whose demand increases when income goes up.

Inferior goods are goods whose demand decreases when income goes up.

Special case goods:

• Giffen goods: Inferior goods; price effect outweighs substitution effect.
  • Price goes up, demand goes up.
  • Example : Rice.
• Veblen goods: Luxury goods; price effect outweighs substitution effect.
  • Price goes up, demand goes up.
  • Example : Luxury watches.

LOS: Describe the phenomenon of dinimishing marginal returns

Marginal return of additional input decreases with each additional input.
Return decreases over time and can become negative.

Example
Softball, chicken wings, and beer…

• Assuming the wage rate in a small fast-food restaurant is fixed. The following table shows the marginal product of labor for the fast-food restaurant.
  
• Because the workspace is limited (numbers of ovens, etc.), adding the fourth worker will increase output, but will decrease the marginal product of labor (MPL).

LOS: Determine and describe breakeven and shutdown points of production.

Breakeven point is when profit is exactly 0.

• Revenue = Total Cost
  • Revenue = Unit sales x Sales price; and
  • Total Cost = Fixed costs + (Variable costs x Unit sales)
    

LOS : Determine and describe breakeven and shutdown points of production.

Shut-Down Point is the minimum price and quantity for keeping operations open.

• Seasonal businesses may choose to close to eliminate variable costs during certain periods.
  

LOS : Describe how economies of scale and diseconomies of scale affect costs.

Economies of scale: decrease in marginal costs as production increases.

• Example: The music industry, where the
  1st disc: millions of dollars and years of work; and the
  2nd disc: 30 cents worth of plastic.

Can arise from:
Internal forces: specialized workforce, more reliable equipment.
External forces: better pricing from suppliers.

Diseconomies of scale: increase in marginal cost when quantity increases.

• Large conglomerates trying to manage too many different lines of business.
• Overlapping business units duplicating products.
  
  Q1 is the ideal firm size.
• Beyond Q1, producing more goods increases per unit costs.

2. THE FIRM AND MARKET STRUCTURES

LOS : Describe characteristics of perfect competition, monopolistic competition, oligopoly, and pure monopoly.

There are four types of economic market structures:

Monopoly

• A monopoly is a profit maximizer.
• Monopolies are price makers.
• There are very high barriers to entry for other firms.
• There is a single seller that controls the whole market
• Price discrimination: Monopolies can change both the price and quality of their products.
• Pure monopolies are regulated by the government.

Examples:
Providers of water, natural gas, telecommunications, and electricity are often granted exclusive rights to service.

Oligopoly

• Profit maximization is a condition in this market.
• Firms under this market structure set their own prices, although there is a great deal of pricing interdependence.
• Barriers to entry are high.
• Make abnormal profits in the long-run.
• Products may be homogeneous.
• A relatively small number of firms supply the market.

Examples:
Industries like oil & gas, airline, automakers, etc.

Monopolistic Competition

• Multiple buyers and sellers in the market.
• Sellers use branding and differentiation to gain market share.
• Sellers have some control over pricing.
• Few barriers to entry.

Examples:
Fast food chains, clothing, etc.

Perfect Competition

• Very large number of buyers ands sellers in the market.
• Homogeneous products.
• Perfect information.
• Firms accepts prices (“price taker”).
• No barriers to entry.
• Profit maximization of sellers.
• No single seller/producer is large enough to influence the market price

Examples:
Agricultural products.

LOS : Explain relationships between price, marginal revenue, marginal cost, economic profit, and the elasticity of demand under each market structure.

Monopoly

• Maximizes profit at point where:
  Marginal Revenue = Marginal Cost
• The firm can adjust price or quantity to