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Economics CFA Level 1

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Calculate and interpret the elasticities of demand (price

elasticity, cross elasticity, income elasticity).

______

The price elasticity of demand measures the change in the quantity demanded in response to a

change in market price (i.e., a movement along a demand curve). The formula is: price elasticity

of demand = percent change in quantity demanded / percent change in price

The cross elasticity of demand measures the change in the demand for a good in response to the

change in price of a substitute or complementary good. The formula is: cross elasticity of

demand = percent change in quantity demanded / percent change in price of substitute or

complement

The income elasticity of demand measures the sensitivity of the quantity of a good or service

demanded to a change in a consumer’s income. The formula is:

income elasticity of demand = percent change in quantity demanded / percent change in

income

Calculate and interpret the elasticity of supply.

______

The price elasticity of supply is similar to the price elasticity of demand. It is a measure of the

responsiveness of the quantity supplied to changes in price. The formula is:

Price elasticity of supply = percent change in quantity supplied / percent change in price

Discuss the factors that influence the elasticity of demand, 3

______

Factors that influence the elasticity of demand include:

1. Availability of substitutes: If good substitutes are available, a price increase in one

product will induce consumers to switch to a substitute good.

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2. Relative amount of income spent on the good: When the portion of consumer budgets

spent on a particular good is relatively small, demand for that good will tend to be

relatively inelastic.

3. Time since the price change: The price elasticity of demand for most products is greater

in the long run than in the short run.

When the portion of consumer budgets spent on a particular

good is relatively small, demand for that good will tend to be

...

______

relatively inelastic, as the consumer is rather indifferent about a price change.

Discuss the factors that influence the elasticity of supply, 2

(one has 3 sub).

______

1. Available resource substitutions: When a good or service can only be produced using

unique or rare inputs, the elasticity of supply will be low.

2. Supply decision time frame: Three time-dependent supply curves must be considered

when evaluating how the length of time following a price change affects the elasticity of

supply:

o Momentary supply refers to the change in the quantity of a good supplied

immediately following the price change. When producers cannot change the

output of a good immediately, the momentary supply curve is vertical or nearly

vertical, and the good is highly inelastic.

o Short-term supply refers to the shape a supply curve takes on as the sequence of

long-term adjustments are made to the production process.

o Long-term supply refers to the shape of the supply curve after all of the possible

ways of adjusting supply have been employed.

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Describe elasticities on a straight-line demand curve,

differentiate among elastic, inelastic, and unit elastic

demand, and describe the relation between price elasticity of

demand and total revenue.

______

Along a linear (straight line) demand curve, demand is more elastic at higher prices, less

elastic at lower prices.

Total revenue is maximized in equilibrium, at the price and quantity where demand is unit

elastic (price elasticity = –1) and so decreases with both price increases or price decreases from

that level.

When price is in the elastic (inelastic) region of the demand curve, a price increase will

decrease (increase) total revenue.

Demand is more elastic at [higher/lower] prices.

______

Demand is more elastic at higher prices, demand is less elastic at lower prices.

Unit elasticity exists when price elasticity of demand = ...

______

price elasticity = –1

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Explain the various means of markets to allocate resources

efficiently (7), marginal benefit and marginal cost, and

demonstrate why the efficient quantity occurs where ...

______

Resources can be allocated by markets or by other means including a command system,

majority rule, contests, first-come-first-served, lotteries, personal characteristics, or force.

Marginal benefit is the benefit derived from consuming one additional unit of a good or service.

Marginal cost is the cost of producing one more unit of a good or service. It is considered an

opportunity cost because it represents the value of the goods the productive resources used could

produce in their next-highest-valued use.

Resources are efficiently allocated when each good or service is produced in a quantity for

which the benefit to society of the last unit produced (marginal benefit) just equals the costs

to society of producing that unit (marginal cost).

Distinguish between the price and the value of a product and

explain the demand curve and consumer surplus.

______

Consumer surplus is the difference between the total value consumers place on the quantity of a

good produced and the total amount they must pay for that quantity.

For an individual, consumer surplus is defined as the sum of the differences between what that

individual is willing to pay for each individual unit of a good or service that he or she

consumes and the amount that she actually pays for each of these units.

The demand curve for a good or service is the sum of all consumers’ downward sloping

marginal benefit curves. Demand curve = marginal benefit curve.

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Distinguish between the cost and the price of a product and

explain the supply curve and producer surplus.

______

Producer surplus is the difference between the total cost of producing output and the total

amount producers receive for it.

The supply curve for a good or service is the sum of all producers’ upward sloping marginal

cost curves and represents quantity that will be willingly produced and sold at different prices.

The complete Study Notes cover the following topics for CFA Level 1 in ten volumes (450 pages):

Alternative Investments (17 pages)

Corporate Finance (28 pages)

Derivatives (30 pages)

Economics (73 pages)

Equities (14 pages)

Financial Statement Analysis (104 pages)

Fixed Income (55 pages)

Markets (16 pages)

Portfolio Management (15 pages)

Quantitative Concepts (105 pages)

The entire collection of all volumes contains over 750 questions and answers about the CFA Level 1 curriculum. The Financial Analyst Study Notes are available for download immediately after verification of your purchase (pdf format, approx. 15 MB).

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