© CFA Institute. For candidate use only. Not for distribution.
ECONOMICS
CFA® Program Curriculum
2024 • LEVEL PREREQUISITE READING • VOLUME 2
,© CFA Institute. For candidate use only. Not for distribution.
©2023 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum vii
Errata vii
Economics
Learning Module 1 Topics in Demand and Supply Analysis 3
Introduction 3
Demand Concepts 4
Price Elasticity of Demand 6
Extremes of Price Elasticity 9
Predicting Demand Elasticity, Price Elasticity, and Total Expenditure 9
Income Elasticity of Demand, Cross-Price Elasticity of Demand 11
Cross-Price Elasticity of Demand 11
Substitution and Income Effects; Normal Goods, Inferior Goods, and
Special Cases 14
Normal and Inferior Goods 15
Supply Analysis: Cost, Marginal Return, and Productivity 17
Marginal Returns and Productivity 17
Marginal Revenue, Marginal Cost and Profit Maximization; Short-Run Cost
Curves: Total, Variable, Fixed, and Marginal Costs 22
Understanding the Interaction between Total, Variable, Fixed, and
Marginal Cost and Output 24
Summary 29
Practice Problems 31
Solutions 34
Learning Module 2 Introduction to the Firm and Market Organization 37
Analysis of Market Structures 37
Analysis of Market Structures 38
Perfect Competition 40
Demand Analysis in Perfectly Competitive Markets 41
Other Factors Affecting Demand 42
Consumer Surplus: Value minus Expenditure 43
Supply Analysis, Optimal Price, and Output in Perfectly Competitive Markets 45
Optimal Price and Output in Perfectly Competitive Markets 47
Long-Run Equilibrium in Perfectly Competitive Markets 50
Monopoly Markets: Demand/Supply and Optimal Price/Output 52
Demand Analysis in Monopoly Markets 54
Supply Analysis in Monopoly Markets 55
Optimal Price and Output in Monopoly Markets 56
Price Discrimination and Consumer Surplus 58
Monopoly Markets: Long-Run Equilibrium 60
Summary 61
References 63
Practice Problems 64
indicates an optional segment
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Solutions 66
Learning Module 3 Aggregate Output, Prices, and Economic Growth 67
Introduction 68
Aggregate Output and Income 69
Gross Domestic Product 70
The Components of GDP 77
Relationship among Saving, Investment, the Fiscal Balance and the
Trade Balance 79
Aggregate Demand and Aggregate Supply 82
Aggregate Demand 83
Aggregate Supply 87
Shifts in the Aggregate Demand Curve 89
Equilibrium GDP and Prices 102
Economic Growth and Sustainability 111
The Production Function and Potential GDP 112
Sources of Economic Growth 114
Measures of Sustainable Growth 119
Measuring Sustainable Growth 122
Summary 124
References 128
Practice Problems 129
Solutions 134
Learning Module 4 Introduction to Business Cycles 137
Introduction 137
Consumer Behavior 138
Consumer Confidence 138
Measures of Consumption 138
Income Growth 139
Saving Rates 140
Housing Sector Behavior 141
Available Statistics 141
Sensitivity to Interest Rates and Relationship to Credit Cycle 141
The Role of Demographics 141
Impact on the Economic Cycle 142
External Trade Sector Behavior 142
Cyclical Fluctuations of Imports and Exports 143
The Role of the Exchange Rate 143
Overall Effect on Exports and Imports 144
Unemployment 145
The Unemployment Rate 146
Overall Payroll Employment and Productivity Indicators 147
Inflation 149
Deflation, Hyperinflation, and Disinflation 150
Measuring Inflation: The Construction of Price Indexes 150
Price Indexes and Their Usage 151
Explaining Inflation 155
Summary 161
indicates an optional segment
ECONOMICS
CFA® Program Curriculum
2024 • LEVEL PREREQUISITE READING • VOLUME 2
,© CFA Institute. For candidate use only. Not for distribution.
©2023 by CFA Institute. All rights reserved. This copyright covers material written
expressly for this volume by the editor/s as well as the compilation itself. It does
not cover the individual selections herein that first appeared elsewhere. Permission
to reprint these has been obtained by CFA Institute for this edition only. Further
reproductions by any means, electronic or mechanical, including photocopying and
recording, or by any information storage or retrieval systems, must be arranged with
the individual copyright holders noted.
CFA®, Chartered Financial Analyst®, AIMR-PPS®, and GIPS® are just a few of the
trademarks owned by CFA Institute. To view a list of CFA Institute trademarks and the
Guide for Use of CFA Institute Marks, please visit our website at www.cfainstitute.org.
This publication is designed to provide accurate and authoritative information
in regard to the subject matter covered. It is sold with the understanding that the
publisher is not engaged in rendering legal, accounting, or other professional service.
If legal advice or other expert assistance is required, the services of a competent pro-
fessional should be sought.
All trademarks, service marks, registered trademarks, and registered service marks
are the property of their respective owners and are used herein for identification
purposes only.
, © CFA Institute. For candidate use only. Not for distribution.
CONTENTS
How to Use the CFA Program Curriculum vii
Errata vii
Economics
Learning Module 1 Topics in Demand and Supply Analysis 3
Introduction 3
Demand Concepts 4
Price Elasticity of Demand 6
Extremes of Price Elasticity 9
Predicting Demand Elasticity, Price Elasticity, and Total Expenditure 9
Income Elasticity of Demand, Cross-Price Elasticity of Demand 11
Cross-Price Elasticity of Demand 11
Substitution and Income Effects; Normal Goods, Inferior Goods, and
Special Cases 14
Normal and Inferior Goods 15
Supply Analysis: Cost, Marginal Return, and Productivity 17
Marginal Returns and Productivity 17
Marginal Revenue, Marginal Cost and Profit Maximization; Short-Run Cost
Curves: Total, Variable, Fixed, and Marginal Costs 22
Understanding the Interaction between Total, Variable, Fixed, and
Marginal Cost and Output 24
Summary 29
Practice Problems 31
Solutions 34
Learning Module 2 Introduction to the Firm and Market Organization 37
Analysis of Market Structures 37
Analysis of Market Structures 38
Perfect Competition 40
Demand Analysis in Perfectly Competitive Markets 41
Other Factors Affecting Demand 42
Consumer Surplus: Value minus Expenditure 43
Supply Analysis, Optimal Price, and Output in Perfectly Competitive Markets 45
Optimal Price and Output in Perfectly Competitive Markets 47
Long-Run Equilibrium in Perfectly Competitive Markets 50
Monopoly Markets: Demand/Supply and Optimal Price/Output 52
Demand Analysis in Monopoly Markets 54
Supply Analysis in Monopoly Markets 55
Optimal Price and Output in Monopoly Markets 56
Price Discrimination and Consumer Surplus 58
Monopoly Markets: Long-Run Equilibrium 60
Summary 61
References 63
Practice Problems 64
indicates an optional segment
, © CFA Institute. For candidate use only. Not for distribution.
iv Contents
Solutions 66
Learning Module 3 Aggregate Output, Prices, and Economic Growth 67
Introduction 68
Aggregate Output and Income 69
Gross Domestic Product 70
The Components of GDP 77
Relationship among Saving, Investment, the Fiscal Balance and the
Trade Balance 79
Aggregate Demand and Aggregate Supply 82
Aggregate Demand 83
Aggregate Supply 87
Shifts in the Aggregate Demand Curve 89
Equilibrium GDP and Prices 102
Economic Growth and Sustainability 111
The Production Function and Potential GDP 112
Sources of Economic Growth 114
Measures of Sustainable Growth 119
Measuring Sustainable Growth 122
Summary 124
References 128
Practice Problems 129
Solutions 134
Learning Module 4 Introduction to Business Cycles 137
Introduction 137
Consumer Behavior 138
Consumer Confidence 138
Measures of Consumption 138
Income Growth 139
Saving Rates 140
Housing Sector Behavior 141
Available Statistics 141
Sensitivity to Interest Rates and Relationship to Credit Cycle 141
The Role of Demographics 141
Impact on the Economic Cycle 142
External Trade Sector Behavior 142
Cyclical Fluctuations of Imports and Exports 143
The Role of the Exchange Rate 143
Overall Effect on Exports and Imports 144
Unemployment 145
The Unemployment Rate 146
Overall Payroll Employment and Productivity Indicators 147
Inflation 149
Deflation, Hyperinflation, and Disinflation 150
Measuring Inflation: The Construction of Price Indexes 150
Price Indexes and Their Usage 151
Explaining Inflation 155
Summary 161
indicates an optional segment
