CFA (Chartered Financial Analyst) Economics Syllabus

Economics syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Economics in CFA (Chartered Financial Analyst), not a summary of it.

1. 1

   Microeconomic Analysis

   4 topics

   • Demand, supply, and elasticities
   • Theory of the firm and cost structures
   • Market structures
     • Perfect competition and monopolistic competition
     • Oligopoly and monopoly
   • Firm pricing, output decisions, and market concentration
2. 2

   Macroeconomic Analysis

   4 topics

   • Aggregate output, prices, and economic growth
   • Business cycles
     • Phases and credit cycles
     • Inflation, unemployment, and economic indicators
   • Monetary and fiscal policy
     • Roles of central banks and money creation
     • Policy interaction and limitations
   • Geopolitics and international trade frameworks
3. 3

   International Economics and Currency

   4 topics

   • International trade and capital flows
   • Balance of payments and trade organizations
   • Currency exchange rates
     • Spot, forward, and cross rates
     • Exchange rate regimes and parity conditions
   • Economics of growth and emerging markets

Economics flashcards for CFA (Chartered Financial Analyst)

23 of 60 cards from the Economics deck — real questions with worked answers.

1. What is the law of demand, and what does the demand function express?

   The law of demand states that, holding other factors constant, the quantity demanded of a good falls as its price rises. The demand function expresses quantity demanded $Q_{d}$ as a function of the good's own price, consumer income, and the prices of related goods, e.g. $Q_{d} = f(P_{own}, I, P_{related})$.

2. Define own-price elasticity of demand and give its formula.

   Own-price elasticity of demand measures the responsiveness of quantity demanded to a change in the good's own price: $$E_{p} = \frac{\% \Delta Q_{d}}{\% \Delta P} = \frac{\partial Q_{d}}{\partial P}\cdot\frac{P}{Q_{d}}$$ It is normally negative; demand is elastic if $|E_{p}| > 1$ and inelastic if $|E_{p}| < 1$.

3. How does total revenue respond to a price change when demand is elastic versus inelastic?

   When demand is elastic ($|E_{p}| > 1$), price and total revenue move in opposite directions (a price cut raises revenue). When demand is inelastic ($|E_{p}| < 1$), price and total revenue move in the same direction (a price increase raises revenue). At unit elasticity ($|E_{p}| = 1$), total revenue is maximized.

4. Define income elasticity of demand and how its sign classifies goods.

   Income elasticity is $E_{I} = \frac{\% \Delta Q_{d}}{\% \Delta I}$. If $E_{I} > 0$ the good is normal; if $E_{I} > 1$ it is a luxury; if $0 < E_{I} < 1$ it is a necessity; if $E_{I} < 0$ the good is inferior.

5. Define cross-price elasticity of demand and interpret its sign.

   Cross-price elasticity is $E_{c} = \frac{\% \Delta Q_{d}^{x}}{\% \Delta P_{y}}$. A positive value indicates the goods are substitutes; a negative value indicates they are complements.

6. What are the three determinants that make demand more elastic?

   Demand tends to be more elastic when (1) more or closer substitutes are available, (2) the good represents a larger share of the consumer's budget, and (3) more time is allowed to adjust (long-run demand is more elastic than short-run).

7. Decompose the total effect of a price change into substitution and income effects for a normal good.

   For a normal good, a price decrease produces a substitution effect (consumers buy more of the now-relatively-cheaper good) and an income effect (higher real income raises quantity demanded). Both effects reinforce each other, so quantity demanded rises. For a Giffen good (a special inferior good), the income effect outweighs the substitution effect, producing an upward-sloping demand curve.

8. Distinguish accounting profit, economic profit, and normal profit.

   Accounting profit = total revenue $-$ explicit (accounting) costs. Economic profit = total revenue $-$ (explicit + implicit opportunity costs). Normal profit is the level of accounting profit at which economic profit equals zero, i.e. the opportunity cost of the owner's resources is just covered.

9. Define total product, average product, and marginal product of labor.

   Total product (TP) is total output. Average product is $AP = \frac{TP}{L}$. Marginal product is $MP = \frac{\Delta TP}{\Delta L}$, the extra output from one more unit of labor. MP intersects AP at AP's maximum.

10. State the law of diminishing marginal returns.

    As successive units of a variable input (e.g. labor) are added to fixed inputs, beyond some point the marginal product of the variable input declines. This causes marginal cost to eventually rise.

11. Give the formulas for average fixed cost, average variable cost, average total cost, and marginal cost.

    $$AFC = \frac{TFC}{Q}, \quad AVC = \frac{TVC}{Q}, \quad ATC = \frac{TC}{Q} = AFC + AVC, \quad MC = \frac{\Delta TC}{\Delta Q}$$ MC intersects both AVC and ATC at their minimum points.

12. Distinguish economies of scale, diseconomies of scale, and constant returns to scale.

    Economies of scale: long-run average total cost (LRATC) falls as output rises (often from specialization and bulk buying). Diseconomies of scale: LRATC rises as output increases (often from coordination/bureaucracy problems). Constant returns to scale: LRATC is flat. The minimum efficient scale is the lowest output at which LRATC is minimized.

13. What is a firm's profit-maximizing output rule?

    A firm maximizes profit by producing the output where marginal revenue equals marginal cost ($MR = MC$), provided MC is rising and price covers average variable cost in the short run (or average total cost in the long run).

14. State the short-run shutdown and the long-run exit conditions for a firm.

    Short-run: continue operating if price $\geq AVC$ (revenue covers variable costs); shut down if price $< AVC$. Long-run: exit if price $< ATC$ (economic losses). A firm operates at a loss in the short run as long as it covers some fixed costs (i.e. $AVC \leq P < ATC$).

15. List the four basic market structures in order of increasing competition.

    From least to most competitive: monopoly (one seller), oligopoly (few sellers), monopolistic competition (many sellers, differentiated products), and perfect competition (many sellers, identical products). They differ by number of firms, product differentiation, barriers to entry, and pricing power.

16. What are the defining characteristics of perfect competition?

    Many sellers, a homogeneous (identical) product, no barriers to entry/exit, perfect information, and firms are price takers facing a perfectly elastic (horizontal) demand curve so that $P = MR$.

17. In perfect competition, what is the firm's long-run equilibrium condition?

    In long-run equilibrium each firm earns zero economic profit, producing where $$P = MR = MC = ATC_{min}$$ Entry and exit drive economic profit to zero and force production at minimum average total cost (allocative and productive efficiency).

18. What distinguishes monopolistic competition from perfect competition?

    Monopolistic competition has many firms and easy entry like perfect competition, but products are differentiated, giving each firm a downward-sloping demand curve and some pricing power. In long-run equilibrium firms earn zero economic profit but produce where $P > MC$ and at output below minimum ATC (excess capacity).

19. Why does monopolistic competition feature non-price competition?

    Because products are differentiated, firms compete through advertising, branding, quality, and innovation rather than price alone. These create perceived differences that support some pricing power despite low entry barriers.

20. What are the defining features of an oligopoly?

    A few large firms that are interdependent, high barriers to entry, products that may be identical or differentiated, and strategic behavior where each firm's decisions depend on rivals' expected responses. Pricing models include the kinked demand curve, Cournot, Stackelberg, and the Nash equilibrium.

21. Explain the kinked demand curve model of oligopoly.

    It assumes rivals match price cuts but not price increases. So above the prevailing price demand is elastic (raising price loses many customers) and below it demand is inelastic. The kink creates a discontinuity in marginal revenue, so prices tend to be rigid (sticky) even when costs change.

22. Define a Nash equilibrium in the context of oligopoly.

    A Nash equilibrium is a set of strategies in which no firm can improve its payoff by unilaterally changing its own strategy, given the strategies of the other firms. It is the standard solution concept for strategic interaction such as the prisoner's-dilemma pricing game among oligopolists.

23. What are the defining characteristics of a monopoly?

    A single seller of a product with no close substitutes, high barriers to entry (e.g. control of resources, patents, network effects, natural monopoly cost structure), and the firm is a price maker facing the market (downward-sloping) demand curve.

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