CFA 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, not a summary of it.

1. 1

   Microeconomics

   3 topics

   • Demand and Supply Analysis
   • Market Structures
   • Consumer Choice Theory
2. 2

   Macroeconomics

   3 topics

   • Aggregate Demand and Supply
   • Monetary and Fiscal Policy
   • International Trade and Capital Flows

Economics flashcards for CFA

23 of 50 cards from the Economics deck — real questions with worked answers.

1. What is the law of demand?

   Holding all else constant (ceteris paribus), the quantity demanded of a good rises as its own price falls and falls as its own price rises, giving the demand curve a negative slope: $\frac{\partial Q_d}{\partial P} < 0$.

2. Write the general form of an own-price demand function and identify its slope term.

   $Q_d = a - b\,P$, where $a$ is the intercept (autonomous demand) and $b>0$ is the slope with respect to own price, so $\frac{dQ_d}{dP} = -b$. The inverse demand is $P = \frac{a}{b} - \frac{1}{b}Q_d$.

3. Define own-price elasticity of demand and its formula.

   It measures the responsiveness of quantity demanded to a change in own price: $E_p = \frac{\%\,\Delta Q_d}{\%\,\Delta P} = \frac{\Delta Q_d}{\Delta P}\cdot\frac{P}{Q_d}$. Demand is elastic if $|E_p|>1$, unit elastic if $|E_p|=1$, and inelastic if $|E_p|<1$.

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

   If demand is elastic ($|E_p|>1$), a price cut raises total revenue; if inelastic ($|E_p|<1$), a price cut lowers total revenue; if unit elastic ($|E_p|=1$), total revenue is unchanged (maximized).

5. Define income elasticity of demand and how it classifies goods.

   $E_I = \frac{\%\,\Delta Q_d}{\%\,\Delta I} = \frac{\Delta Q_d}{\Delta I}\cdot\frac{I}{Q_d}$. If $E_I>0$ the good is normal ($E_I>1$ luxury, $0<E_I<1$ necessity); if $E_I<0$ the good is inferior.

6. Define cross-price elasticity of demand and what its sign indicates.

   $E_{c} = \frac{\%\,\Delta Q_d^{A}}{\%\,\Delta P^{B}}$. A positive value indicates the goods are substitutes; a negative value indicates they are complements.

7. State the determinants that make demand more elastic.

   Demand is more elastic when: close substitutes are available, the good is a large share of the budget, the good is a luxury rather than a necessity, the good is narrowly defined, and more time is allowed for adjustment.

8. Decompose the total effect of a price change into its two components.

   A price change produces a substitution effect (always toward the relatively cheaper good) and an income effect (change in real purchasing power). For a normal good both reinforce; for an inferior good they oppose; for a Giffen good the income effect dominates so demand slopes upward.

9. Distinguish a Giffen good from a Veblen good.

   A Giffen good is a strongly inferior good whose negative income effect outweighs the substitution effect, so quantity demanded rises with price. A Veblen good is a prestige good demanded more at higher prices because its high price signals status. Both can have upward-sloping demand but for different reasons.

10. How is consumer surplus defined and shown on a demand diagram?

    Consumer surplus is the difference between the maximum price consumers are willing to pay and the price they actually pay, equal to the area below the demand curve and above the market price.

11. How is producer surplus defined and shown on a supply diagram?

    Producer surplus is the difference between the price producers receive and their minimum acceptable (marginal-cost) price, equal to the area above the supply curve and below the market price.

12. What condition defines market equilibrium and what causes a shortage or surplus?

    Equilibrium occurs where quantity demanded equals quantity supplied, $Q_d = Q_s$, at the market-clearing price. A price below equilibrium creates a shortage (excess demand); a price above equilibrium creates a surplus (excess supply).

13. State the total-utility maximization (equimarginal) rule for consumer choice.

    A consumer maximizes utility by allocating the budget so the marginal utility per unit of currency is equal across all goods: $\frac{MU_x}{P_x} = \frac{MU_y}{P_y} = \cdots$, subject to $P_x x + P_y y = I$.

14. Define the marginal rate of substitution (MRS) and its relation to indifference curves.

    The MRS is the rate at which a consumer will trade one good for another while remaining equally satisfied: $MRS_{xy} = -\frac{dy}{dx}\Big|_{U} = \frac{MU_x}{MU_y}$. It equals the (absolute) slope of the indifference curve and diminishes as we move down a convex curve.

15. State the consumer's optimum condition using indifference curves and the budget line.

    The optimum is the tangency where the indifference curve touches the budget line, i.e. $MRS_{xy} = \frac{MU_x}{MU_y} = \frac{P_x}{P_y}$, meaning the marginal valuation ratio equals the price ratio.

16. What is the law of diminishing marginal utility?

    As a consumer consumes additional units of a good within a given period, the extra (marginal) utility obtained from each successive unit eventually declines, while total utility rises at a decreasing rate.

17. Give the four defining characteristics of perfect competition.

    (1) Many buyers and sellers, (2) a homogeneous (identical) product, (3) no barriers to entry or exit, and (4) firms are price takers facing a perfectly elastic (horizontal) demand curve. There is no non-price competition.

18. State the profit-maximizing output rule common to all market structures.

    A firm maximizes profit by producing the output where marginal revenue equals marginal cost, $MR = MC$, provided price is at least average variable cost in the short run: $P \geq AVC$.

19. For a perfectly competitive firm, how do price, marginal revenue, and demand relate?

    Because the firm is a price taker, $P = MR = AR = d$; the firm's demand curve is horizontal at the market price, so it maximizes profit where $P = MR = MC$.

20. State the shut-down and break-even conditions for a firm in the short run and long run.

    Short-run shut-down: produce only if $P \geq AVC$; below that, minimize loss by shutting down (loss equals fixed cost). Long-run break-even/entry-exit: operate only if $P \geq ATC$; the long-run equilibrium in perfect competition has $P = MC = \text{minimum } ATC$ and zero economic profit.

21. Compare the four market structures on number of firms, product type, and pricing power.

    Perfect competition: many firms, identical product, no pricing power (price taker). Monopolistic competition: many firms, differentiated product, some pricing power. Oligopoly: few firms, identical or differentiated product, considerable interdependent pricing power. Monopoly: one firm, unique product with no close substitutes, significant pricing power.

22. Why does a monopolist's marginal revenue lie below its price, and what is the MR expression?

    To sell more, a monopolist (single-price) must lower price on all units, so $MR < P$. With inverse demand $P = a - bQ$, total revenue is $TR = aQ - bQ^2$ and $MR = \frac{dTR}{dQ} = a - 2bQ$, twice as steep as demand.

23. Give the profit-maximizing markup relationship (Lerner index) for a firm with pricing power.

    $\frac{P - MC}{P} = -\frac{1}{E_p}$, so the optimal price is $P = \frac{MC}{1 + \frac{1}{E_p}}$. More elastic demand (larger $|E_p|$) implies a smaller markup over marginal cost.

See more Economics flashcards →

Planning Economics for CFA

Economics (CFA) FAQ