CFA Level 1 Economics
1. Microeconomics
1.1 Demand and Supply Analysis
Demand
Law of Demand: As price decreases, quantity demanded increases
(inverse relationship), ceteris paribus.
Determinants of Demand:
o Price of the good
o Income levels (normal vs. inferior goods)
o Prices of related goods (substitutes and complements)
o Consumer tastes and preferences
o Expectations about future prices and income
o Population and demographics
Types of Demand Elasticity:
o Price Elasticity of Demand (PED) = (% Change in Qd) / (%
Change in Price)
Elastic (>1): High sensitivity to price changes
Inelastic (<1): Low sensitivity to price changes
Unit Elastic (=1): Proportional response to price changes
o Income Elasticity: Measures how demand changes with
income levels.
o Cross-Price Elasticity: Measures how demand for one good
responds to price changes in another.
Supply
Law of Supply: As price increases, quantity supplied increases,
ceteris paribus.
Determinants of Supply:
o Production costs (labour, raw materials, capital)
o Technology improvements
, o Number of sellers in the market
o Expectations of future prices
o Government policies (taxes, subsidies, regulations)
Elasticity of Supply: Measures how responsive the quantity
supplied is to changes in price.
Market Equilibrium
Equilibrium Price: The price where quantity demanded equals
quantity supplied.
Effects of Shifts in Demand and Supply:
o Increase in demand → Higher price, higher quantity
o Decrease in demand → Lower price, lower quantity
o Increase in supply → Lower price, higher quantity
o Decrease in supply → Higher price, lower quantity
1.2 Consumer and Producer Surplus
Consumer Surplus: The difference between what consumers are
willing to pay and the actual price they pay.
Producer Surplus: The difference between what producers receive
for a good and the minimum they are willing to accept.
Economic Welfare: The sum of consumer and producer surplus
represents total market efficiency.
1.3 Market Structures
Perfect Competition:
o Many small firms, homogeneous products, free entry and exit.
o No pricing power; firms are price takers.
o Example: Agricultural markets.
Monopolistic Competition:
o Many firms, differentiated products, some pricing power.
o Examples: Restaurants, clothing brands.
Oligopoly:
1. Microeconomics
1.1 Demand and Supply Analysis
Demand
Law of Demand: As price decreases, quantity demanded increases
(inverse relationship), ceteris paribus.
Determinants of Demand:
o Price of the good
o Income levels (normal vs. inferior goods)
o Prices of related goods (substitutes and complements)
o Consumer tastes and preferences
o Expectations about future prices and income
o Population and demographics
Types of Demand Elasticity:
o Price Elasticity of Demand (PED) = (% Change in Qd) / (%
Change in Price)
Elastic (>1): High sensitivity to price changes
Inelastic (<1): Low sensitivity to price changes
Unit Elastic (=1): Proportional response to price changes
o Income Elasticity: Measures how demand changes with
income levels.
o Cross-Price Elasticity: Measures how demand for one good
responds to price changes in another.
Supply
Law of Supply: As price increases, quantity supplied increases,
ceteris paribus.
Determinants of Supply:
o Production costs (labour, raw materials, capital)
o Technology improvements
, o Number of sellers in the market
o Expectations of future prices
o Government policies (taxes, subsidies, regulations)
Elasticity of Supply: Measures how responsive the quantity
supplied is to changes in price.
Market Equilibrium
Equilibrium Price: The price where quantity demanded equals
quantity supplied.
Effects of Shifts in Demand and Supply:
o Increase in demand → Higher price, higher quantity
o Decrease in demand → Lower price, lower quantity
o Increase in supply → Lower price, higher quantity
o Decrease in supply → Higher price, lower quantity
1.2 Consumer and Producer Surplus
Consumer Surplus: The difference between what consumers are
willing to pay and the actual price they pay.
Producer Surplus: The difference between what producers receive
for a good and the minimum they are willing to accept.
Economic Welfare: The sum of consumer and producer surplus
represents total market efficiency.
1.3 Market Structures
Perfect Competition:
o Many small firms, homogeneous products, free entry and exit.
o No pricing power; firms are price takers.
o Example: Agricultural markets.
Monopolistic Competition:
o Many firms, differentiated products, some pricing power.
o Examples: Restaurants, clothing brands.
Oligopoly:
