Summary

Summary CFA LEVEL 1 - ECONOMICS

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Course
CFA LEVEL 1

Institution
RMIT University (RMIT )

Book
CFA Program Curriculum 2018 Level I

I create this summary of knowledge related to CFA level 1 for my 2017 December exam. I got into the top 10% with this. Hope this can help you. (This does not guarantee for your pass, which requires dedication, hardwork and consistency. In case having trouble with any part, please refer to CFA note...

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Summarized whole book? No
Which chapters are summarized? Economics
Uploaded on October 26, 2018
Number of pages 15
Written in 2017/2018
Type Summary

cfa level 1 economics
economics
cfa economics

Book Title:CFA Program Curriculum 2018 Level I

Author(s):CFA Institute

Edition:2017
ISBN:9781119396659
Edition:Unknown

Institution
RMIT University (RMIT )
Course
CFA LEVEL 1

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Concepts Description
Demand and Supply Analysis
Elasticity Measure the ratio of the % change in one variable to a % of change in another

Own‐price elasticity: % change in demand ‐ to ‐ % change in its own price
∆
% ∆
% ∆ ∆

Cross‐price elasticity: % change in demand ‐ to ‐ % change in related good price

∆
% ′ ∆
% ∆ ′ ∆ ′
′
Income elasticity: % change in demand ‐ to ‐ % change in income

∆
% ∆
% ∆ ∆
|Own‐price elasticity| > 1 → demand is elas c
|Own‐price elasticity| < 1 → demand is inelas c
Cross‐price elasticity > 0 → related good is a subs tute (could replace each other)
Cross‐price elasticity < 0 → related good is a complement (go with each other, e.g.: car and petrol)
Income elasticity < 0 → Inferior good
Income elasticity > 0 → normal good

Substitution effect, and Substitution effect: When price of a good X decreases, there is a shift in consumption toward good X, and vice versa
income effect Income effect: When price of a good X decreases, there is a shift in consumption toward more or less good X

3 possible outcome:
Substitution effect: Positive + Income effect: Positive → Consump on of Good X increase
Substitution effect: Positive + Income effect: Negative, but smaller than substitution effect → Consump on of Good X increase
Substitution effect: Positive + Income effect: Negative, but larger than substitution effect → Consump on of Good X decrease

Normal good vs. inferior good Normal good: income effect ‐ positive ; income elasticity ‐ positive (increase in income → increase in demand)
Inferior good: income effect ‐ negative ; income elasticity ‐ negative (increase in income → decrease in demand)

Giffen good: negative income effect > substitution effect
Veblen good: Increase in price → increae in demand (e.g.: Rolex, Gucci)

Marginal returns Marginal returns: additional output produced by using one more productive input, given other input constant
As productive quantities increase, they will reach a point of diminishing marginal returns (↑input, ↓marginal returns)

Shutdown and Breakeven Point Perfect competition:
‐ Breakeven point: price = average total cost
‐ Average total cost > Price > Average variable cost → continue to operate in the short run, but shut down in the long run
‐ Average variable cost > Price → Shut down

Imperfect competition:
‐ Breakeven point: Total revenue = total cost
‐ Total cost > Total revenue > Total variable cost → con nue to operate in the short run, but shut down in the long run
Total variable cost > Total revenue → Shut down
Economies and Diseconomies of 1. Larger scale + Long run Average total cost decrease → Economies of scale
Scale 2. Lowest point on Long run Average total cost → Minimum eﬃcient scale
3. Beyond the minimum efficient scale → Larger scale + Long run Average total cost increase

, Concepts Description
Firm Structure ‐ Market Structure
Characteristics of market structure Perfect Monopolistic Oligopoly Monopoly
competition competition

Number of sellers Many firms Many firms Few firms Single firms

Barriers to entry Very low Low High Very high

Nature of substitute products Very good substitutes Good substitutes, but Very good substitutes, or No good substitutes
differentiated differentiated
Nature of competition
Price only Price, marketing, and features Price, marketing, and Advertising
features
Pricing power Some
None Some to significant Significant

Perfect competition Short‐run equilibrium Long‐run equilibrium

In equilibrium:
Marginal revenue = Marginal cost = Price
Perfectly elastic demand curve
Could not earn economic profit in the long‐run, since very low barrier to entry → attract new firms if there is an economic profit

Monopolistic competition Short‐run equilibrium Long‐run equilibrium

In equilibrium:
Marginal revenue = Marginal cost < Price
Highy elastic demand curve (elasticity > 1)
Could not earn economic profit in the long‐run, since very low barrier to entry → attract new firms if there is any economic profit

Oligopoly 4 models:
1. Kinked demand curve:
if a firm increase its price
→ compe tors do not increase price

if a firm decrease price
→ compe tors decrease price

2. Cournot duopoly model: Consider oligopoly with 2 firms, both have identical and constant marginal cost of production. Using the quantity supplied of the other firm in previous
periods, a firm determines its demand curve, marginal revenue curve and profit maximisation quantity. These quantities will change each period until they are equal → stable
equilibrium.
3. Nash equilibrium: applying prisoner's dilemma
Nash equilibrium = both firms cheat on the collusion,
even though the best outcome is to both honor the agreement

4. Stackelberg dominant firm model: a dominant firm with large market share, greater scale an lower cost structure.
↓ price →↓demand of compe tor ﬁrms
Dominant firm sets the price as MR of dominant firm = MC of dominant firm (< price)
Competitors takes that as market price

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