Chartered Financial Analyst (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 Chartered Financial Analyst (CFA), not a summary of it.

1. 1

   Microeconomic Foundations

   3 topics

   • Demand, Supply, and Market Equilibrium
     • Elasticities of demand and supply
     • Consumer surplus, producer surplus, and deadweight loss
     • Effects of price controls, taxes, and subsidies
   • The Firm and Market Structures
     • Costs of production and economies of scale
     • Perfect competition and monopolistic competition
     • Oligopoly and monopoly pricing and concentration measures
   • The Demand and Supply of the Firm's Inputs
     • Marginal revenue product and factor markets
     • Profit maximization and breakeven analysis
2. 2

   Macroeconomics and the Business Cycle

   3 topics

   • Aggregate Output, Prices, and Economic Growth
     • GDP measurement and aggregate demand/supply
     • Sources of economic growth and the production function
     • Solow growth model and convergence
   • Understanding Business Cycles
     • Phases of the business cycle and economic indicators
     • Inflation, deflation, and measures of price level
     • Unemployment and labor market indicators
   • Fiscal Policy
     • Tools and objectives of fiscal policy
     • Fiscal multipliers and crowding out
     • Debt sustainability and automatic stabilizers
3. 3

   Monetary Policy and International Economics

   3 topics

   • Monetary Policy and Central Banks
     • Functions of money and money creation
     • Central bank objectives and the Taylor rule
     • Quantitative easing and the limits of monetary policy
   • Geopolitics and International Trade
     • Comparative advantage and trade restrictions
     • Balance of payments accounts
     • Trade organizations and capital flows
   • Currency Exchange Rates
     • Spot, forward rates, and currency cross rates
     • Covered and uncovered interest rate parity
     • Exchange rate regimes and the impact on trade
4. 4

   Economic Analysis for Investment (Levels II and III)

   3 topics

   • Currency Exchange Rate Determination and Forecasting
     • Mundell-Fleming model and monetary models
     • Portfolio balance approach and carry trade
   • Economic Growth and the Investment Decision
     • Drivers of long-run growth and convergence hypotheses
     • Government policies and equity market valuation
   • Economics of Regulation
     • Rationale for regulation and regulatory tools
     • Cost-benefit analysis of regulation

Economics flashcards for Chartered Financial Analyst (CFA)

23 of 67 cards from the Economics deck — real questions with worked answers.

1. What is the law of demand?

   As the price of a good rises (holding all else constant), the quantity demanded of that good falls, and vice versa. This produces a downward-sloping demand curve.

2. How do you decompose the total price effect on quantity demanded into substitution and income effects?

   The total effect = substitution effect (consumers switch toward relatively cheaper substitutes) + income effect (a price change alters real purchasing power). For a normal good both effects reinforce each other; for a Giffen good the negative income effect outweighs the substitution effect, producing an upward-sloping demand curve.

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

   It measures the responsiveness of quantity demanded to a change in the good's own price: $$E_{p} = \frac{\% \Delta Q_{d}}{\% \Delta P}.$$ Demand is elastic if $|E_{p}| > 1$, unit elastic if $|E_{p}| = 1$, and inelastic if $|E_{p}| < 1$.

4. How are income elasticity and cross-price elasticity used to classify goods?

   Income elasticity $E_{I} = \frac{\% \Delta Q_{d}}{\% \Delta I}$: positive means a normal good, negative means an inferior good. Cross-price elasticity $E_{c} = \frac{\% \Delta Q_{d}^{A}}{\% \Delta P_{B}}$: positive indicates substitutes, negative indicates complements.

5. What conditions define market equilibrium, and what happens during a surplus or shortage?

   Equilibrium occurs where quantity demanded equals quantity supplied ($Q_{d} = Q_{s}$). Above equilibrium price there is a surplus ($Q_{s} > Q_{d}$) that pushes price down; below it there is a shortage ($Q_{d} > Q_{s}$) that pushes price up. Stable equilibrium requires that these forces restore the equilibrium price.

6. How are consumer surplus, producer surplus, and total surplus defined?

   Consumer surplus = area below the demand curve and above the market price (value received minus price paid). Producer surplus = area above the supply curve and below the market price (price received minus marginal cost). Total surplus = consumer surplus + producer surplus, maximized at competitive equilibrium.

7. What is the breakeven point and the shutdown point for a firm?

   Breakeven point: price (or output) where total revenue equals total cost, i.e., $P = ATC$ (economic profit = 0). Shutdown point: the minimum point of average variable cost; if $P < AVC$ the firm shuts down in the short run because it cannot cover variable costs.

8. State the profit-maximization rule for a firm.

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

9. List the four market structures and their defining number of sellers and pricing power.

   1) Perfect competition: many sellers, no pricing power (price takers). 2) Monopolistic competition: many sellers, differentiated products, some pricing power. 3) Oligopoly: few sellers, interdependent, significant pricing power. 4) Monopoly: single seller, substantial pricing power (price maker).

10. In perfect competition, what is the relationship among price, marginal revenue, and demand for the firm?

    The individual firm faces a perfectly elastic (horizontal) demand curve at the market price, so $P = MR = AR = D$. Profit is maximized where $P = MR = MC$, and in long-run equilibrium $P = MC = \text{minimum } ATC$ (zero economic profit).

11. How does a monopolistically competitive firm behave in long-run equilibrium?

    Each firm produces where $MR = MC$ and sets price above marginal cost using product differentiation. Free entry erodes economic profit to zero, so price equals average total cost ($P = ATC$) but exceeds $MC$, leaving excess capacity (output below minimum-ATC scale).

12. What does the kinked demand curve model predict about oligopoly pricing?

    It assumes rivals match price decreases but not price increases, making demand elastic above the current price and inelastic below it. This creates a kink and a discontinuity in marginal revenue, so prices tend to be sticky even when marginal costs change.

13. Compare the Cournot, Stackelberg, and Nash approaches in oligopoly.

    Cournot: firms simultaneously choose quantities, each assuming rivals' output is fixed. Stackelberg: a dominant leader sets quantity first and followers react. Nash equilibrium: a general outcome in which no firm can improve its payoff by unilaterally changing strategy given others' strategies.

14. What is the Herfindahl-Hirschman Index (HHI) and how is it interpreted?

    $$HHI = \sum_{i=1}^{N} (\text{market share}_{i} \times 100)^{2}.$$ It sums squared percentage market shares of firms. Higher values mean greater concentration; U.S. regulators broadly view $HHI < 1500$ as unconcentrated, $1500$–$2500$ as moderately concentrated, and $> 2500$ as highly concentrated.

15. What is the N-firm concentration ratio and a key weakness it has?

    The N-firm concentration ratio is the sum of the market shares of the N largest firms (commonly the top four). Its main weakness is that it ignores mergers among the largest firms once they are already in the top N and does not reflect the effect of barriers to entry; the HHI corrects part of this.

16. What determines the demand for a factor of production (an input)?

    Input demand is a derived demand—derived from the demand for the output it produces. A firm hires more of an input as long as the marginal revenue product (MRP) of the input exceeds its marginal cost (e.g., the wage).

17. Define marginal revenue product (MRP) of a factor and the profit-maximizing hiring rule.

    MRP = the additional revenue from employing one more unit of an input = marginal product of the input × marginal revenue of output ($MRP = MP \times MR$). A firm hires up to the point where $MRP$ equals the input's marginal cost (e.g., $MRP_{L} = w$ for labor).

18. State the cost-minimizing condition for combining two inputs, labor and capital.

    Costs are minimized when the ratio of marginal products to input prices is equal across inputs: $$\frac{MP_{L}}{w} = \frac{MP_{K}}{r},$$ where $w$ is the wage and $r$ is the rental rate of capital.

19. How is economic rent on a factor defined, and how does factor supply elasticity affect it?

    Economic rent is the payment to a factor above the minimum amount (opportunity cost) needed to keep it in its current use. The more inelastic (fixed) the factor's supply, the larger the share of its payment that is economic rent; perfectly elastic supply earns no rent.

20. Define GDP and distinguish the expenditure and income approaches.

    GDP is the total market value of all final goods and services produced within an economy in a given period. Expenditure approach: $GDP = C + I + G + (X - M)$. Income approach: sums all income earned (wages, interest, rent, profit) plus the capital consumption allowance (depreciation) and indirect business taxes. Both yield the same total.

21. How are nominal GDP, real GDP, and the GDP deflator related?

    Nominal GDP uses current prices; real GDP uses base-year prices to remove inflation. $$\text{GDP deflator} = \frac{\text{Nominal GDP}}{\text{Real GDP}} \times 100.$$

22. What is the relationship between saving, investment, the fiscal balance, and the trade balance?

    From national accounts: $$(S - I) = (G - T) + (X - M).$$ Private saving minus investment equals the government deficit plus the trade surplus. Equivalently, the sum of private, government, and external balances must net to zero.

23. What distinguishes the short-run aggregate supply (SRAS) curve from the long-run aggregate supply (LRAS) curve?

    SRAS is upward sloping because some input prices (especially wages) are sticky, so higher output prices raise profits and output. LRAS is vertical at potential (full-employment) GDP because in the long run all prices and wages adjust, making output independent of the price level.

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