Microeconomics for CFA L1 - Custom Scholars
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# Microeconomics for CFA L1

question
GDP Deflator
% Chg in QD of Good A/% Change in Price for Good B
20%/-10% = -2 -> The good is a compliment, because we demand more of Good A, when we can afford more it's a complement
-20%/-10% = 2 -> The goods are substitutes because we demand less of good A when the price of good B goes down. We demand less of Good A and opt for Good B.
-20%/10% = -2 -> The good is a substitute, We demand less of Good A
question
real GDP per capita
1415
question
formula for cross-price elasticity of demand
The net effect is the sum of the substitution effect and income effect.
question
# of concepts for the CFA
Describes how consumption varies with prices and utility h(p1...pn, u)
question
Net Effect (Substitution and Income)
shift the curve, only changing the y-intercept, slope does not change
question
Hicksian demmand
move us along the supply/demand curve but don't shift it
question
For the demand curve, changes in income and wages
To the right, people will buy more at every price
question
Changes in price and quantity
Q = -64 + 37Px - 7.5w (where P is price and w is wages)
question
An increase in income shifts the demand curve
Qdx = 2 - .4Px + .05I + .15Py (Where Px is the price of the first good and Py is the price of a second good and I is income) A positive sign in front of Py means we have a substitute product.
question
Equation of Supply Curve
Solve for Px, ie. Px = 15.9 - 2.5Qx
question
Demand Function
Solve for Px
question
Inverse Demand Function
Shifts inward/left, willing to supply less at every price
question
Inverse Supply Function
1. Start with the demand function 2. Multiply each term by the number of buyers 2. to find the new demand curve solve for Px.
question
If wages increase, the supply curve
i.e. 6360 - 400Px = -1116 + 300Px
Px = 10.68
question
Aggregate demand curves
The coeff of the slope of the supply curve is positive, the coeff of the slope of the demand curve is negative
question
Equating the supply and demand function will give us equilibrium price (partial equilibrium) full equilibrium includes wages and income.
Buyers keep buying based on an idea that the value will go up
question
When there is stable equilibrium, the coefficients of the supply and demand curve
Qdx = 6360 -400(12) = 1560
Qsx = -1116 + 300(12) = 2484
Excess supply = 2484-1560 = 924
Subtract Qd from Qs
question
When there are bubbles
Subtract Qsx from Qdx
3160-1284 = 1,876
question
Find the excess supply when Px = 12
Competitive and non-competitive bids are entered at different price levels. The price is dropped until all inventory is accounted for. All bids are filled at the last price level. https://image.slidesharecdn.com/wasim-120331103946-phpapp01/95/dutch-auction-20-728.jpg?cb=1333192825
question
Find excess demand when Px = 8
Qdx = 6360 -400(8) = 3160
Qsx = -1116 + 300(8) = 1284
57:52 Surplus
question
Modified Dutch Auction
total expenditure = P * Q
question
Left off at Video one
Use 1/2bh to figure out consumer surplus, height = intercept - price
question
total expenditure
question
consumer surplus on a graph
Change in Q/Change in P will give you the price coeff/slope
question
price ceiling
Qdx = 11,200 - 400(3) = 10,,000
Edpx = -400(3/10,000) = -.12
If the price elasticity of demand is < 1, then the demand is inelastic
question
price floor
the more elastic demand gets, people will buy less at higher prices
question
An increase in taxes shifts the demand curve
demand is not very sensitive
question
Own price elasticity of demand
demand is very sensitive
question
Calculate price elasticity of demand at a price P=3
Qdx = 11,200-400Px
Edpx = 1
question
As price moves up the downward sloping demand curve,
Edx = 0
question
Inelastic
Edx = infinity
question
Elastic
More elastic, people will cut back if price increases
question
unit elastic
Inelastic/less elastic, people will cut back very little if price increases
question
perfectly inelastic
If it's a small part of budget, it's more inelastic, we'll be insensitive to price changes
question
Perfectly elastic
results in greater quantity demanded and an increase in total expenditure
question
If availability of substitutes is high
results in greater quantity demanded and a DROP in total expenditure
question
If availability of substitutes is high
Quantity demand at each price increase by .8% for each 1% increase in income
If EdI > 0 normal good
If EdI < 0 inferior good
question
Elasticity in regards to % of budget a good represents
1. Completeness - consumers know their preferences, they can be ranked
2. Transitivity - Preferences are transitive A>B, B>C, A>C
3. Non-satiation - consumers prefer more
question
When demand is elastic, a fall in Px
MRS = Y/X - the slope of the line, as Towards the right of the indifference curve we are willing to give up very little of the y-axis item to receive a little bit of good x, smaller slope
question
When demand is inelastic, a fall in Px
The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater
question
if Income Elasticity of demand = .8
On an indifference curve, if income goes up, the indifference curve will shift out to the right
question
Utility Theory
We are willing to buy more
question
Graph of Perfect Substitutes
We will consume less of that good
question
Graph of perfect compliment
decreases, demand becomes more elastic, we can buy more for less
question
Marginal Rate of Substitution (MRS)
there will be a substitution effect, more substitutions and income effect, real income increases

Substitution is a movement along the initial indifference curve, income accounts for the rest of the change in quantity
question
The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater
There will be more substitutions, we move to the right along the indifference curve, the income effect decreases the quantity we purchase
question
On an indifference curve, if income goes up, the indifference curve will shift out to the right
an inferior good, for which the income effect overpowers the substitution effect where S-I is not greater than 0

A company sells a Pom Pilot, as the price drops for the product people find it less and less attractive to buy
question
If income increase for a normal good
Higher prices indicate to consumers that the good is more valuable, status products
question
If income increases for an inferior good
This is a normal return
question
As price for a normal good decreases, the slope of the line tangent to the distance curve
This is an abnormal return
question
For a normal good, if price drops
Price X Quantity
question
For an inferior good, if price drops
Horizontal, no matter how much it makes it can't effect the price
question
What is a Giffen Good
Total Revenue/ Quantity = Price
question
What is a Veblen good?
When all companies sell identical products, market share does not influence price
question
If accounting profit - opportunity costs = 0 (Opportunity cost is Required Rate of Return)
AFC + AVC (Avg fixed cost + avg variable cost)
The min of the ATC shows the min/cost per unit
question
If accounting profit - opportunity costs > 0
The marginal cost is the change in the total cost that arises when the quantity produced is incremented
question
Total Revenue =
At point a, the firm profit < 0 because price is lower than cost. This is a shutdown point.
question
An individual firm's demand curve is...
At point B, the economic breakeven has been reach, TR=TC, ROE=RRR, above B Accty profit > 0
question
Average revenue =
Short-run | Long-run
Below A - shutdown | Leave
A-T - produce | leave
Above B - produce | stay
question
Perfect competition
MR=MC Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.
question
Production Function
Output or Q
question
Total fixed cost
Quantity/Quantity of Labor
question
Average Total Cost (ATC)
chg in Q/ chg in labor
question
marginal cost curve
The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output. After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yield decreased per-unit incremental returns.
question
Shutdown point
Marginal product of labor is a measurement of a change in output when additional labor is added. However, all other factors remain constant. To calculate marginal product of labor you simply divide the change in total product by the change in labor.
question
Breakeven
Gives us the additional output (units) of product we get for an additional \$1 of labor
question
Summary of cost curve analysis
Gives us the additional output in unit we can get by adding \$1 of capital
question
Profit maximization
Increase output by adding labor until the two are equal
question
What happens to prices in an increasing cost industry, decreasing cost industry and constant cost industry?
What combination of two inputs will allow us to produce something for the least amount of cost.?
We have optimized production when the Marginal Product (MP) of adding one more unit of labor = the marginal product of adding one more unit of capital.
i.e. MP/Price of one unit of labor = Additional Productivity added per unit of labor
\$100 of perfume/\$20 of labor of one human, I get 5 times as much in productivity value
question
total product =
Profit is maximized when MRP/Pl = l
If MRP/l > 1 then add labour
question
avg product =
Look at the sign in front of the price of good B. Qdx = 8.45 - 6.39Px + .25I - 2Py (Py represents price of good B)
Negative = complement
positive = substitute
question
marginal product =
The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce. All firms choose output (quantity) simultaneously.
question
factors of production
The concept that determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy. Start by determining the firm with the dominant strategy. The scenario in which one firm will always choose a certain strategy. Then, look at what the other firm would do when the dominant firm chooses that strategy. This will show us the Nash equilibrium.
question
diminishing marginal returns
In the dominant firm model where there is a price leader, all competitive firms follow the price of the leader. The slope of the follower demand curve is steeper than the leader firms demand curve.
question
Marginal product of labor
Sum of the squares of the top 50 firms' market shares
- Higher is closer to monopoly
- Max is 10 000
question
MPl/Pl (Marginal product of labor/price of labor)
Sum of the market share of the n largest firms. Aproblem with this approach is it does not take into account elasticity of demand. When e of demand is high, there is near perfect competition.
question
MPk/Pk (Marginal product of capital/Price of capital)
MC = P(1-1/price elasticy of demand)
40 = P(1-1/1.5)
P = 120
question
If marginal product of labor > marginal product of capital
HHI is an index in which the market shares of n companies are squared and then added. A score of 2500 or higher indicates a high concentration.
question
rule of least cost
old value - new value/ old value
question
Profit maximization of an input
profit is maximized at MR = MC or M/Mc =
MR = MP * P = MRP
MC = P input
negative
question
How do we determine if a good is a compliment or a substitute using the demand function?
positive
question
Courtnot Oligopoly
We demand a lot more of a good when the price of it's compliment or substitute changes a little

We drive 2 more mile for every 1% decrease in the gas price
2:1 = 2
question
Nash Equilibrium
A 2% increase in demand for Crest for every 3% price decrease in the price of toothbrushes
2/-3 = -2/3 which means the good is a compliment
question
Dominant firm model
The price coeff of A * (Price of B/QD of A substituting the price of B)
question
Herfindahl Index
associated with deflation, no matter how much money is pumped into the system, interest rates do not fall and people continue to hoard their money
question
concentration ratio
undefined
question
Calculate the price a company will be most likely to set it's price at given price elasticity of demand 1.5, and marginal cost 40.
undefined
question
HHI Index
undefined
question
Percent Change Formula
undefined
question
A complement will have a blank cross price elasticity of demand
undefined
question
A substitute will have a blank cross price elasticity of demand
undefined
question
When cross price-elasticity of demand is greater than 1
undefined
question
when cross price elasticity of demand is greater than 0
undefined
question
Calculating cross-price elasticity of demand of A
undefined
question
A liquidity trap is
undefined
1 of 95
question
GDP Deflator
% Chg in QD of Good A/% Change in Price for Good B
20%/-10% = -2 -> The good is a compliment, because we demand more of Good A, when we can afford more it's a complement
-20%/-10% = 2 -> The goods are substitutes because we demand less of good A when the price of good B goes down. We demand less of Good A and opt for Good B.
-20%/10% = -2 -> The good is a substitute, We demand less of Good A
question
real GDP per capita
1415
question
formula for cross-price elasticity of demand
The net effect is the sum of the substitution effect and income effect.
question
# of concepts for the CFA
Describes how consumption varies with prices and utility h(p1...pn, u)
question
Net Effect (Substitution and Income)
shift the curve, only changing the y-intercept, slope does not change
question
Hicksian demmand
move us along the supply/demand curve but don't shift it
question
For the demand curve, changes in income and wages
To the right, people will buy more at every price
question
Changes in price and quantity
Q = -64 + 37Px - 7.5w (where P is price and w is wages)
question
An increase in income shifts the demand curve
Qdx = 2 - .4Px + .05I + .15Py (Where Px is the price of the first good and Py is the price of a second good and I is income) A positive sign in front of Py means we have a substitute product.
question
Equation of Supply Curve
Solve for Px, ie. Px = 15.9 - 2.5Qx
question
Demand Function
Solve for Px
question
Inverse Demand Function
Shifts inward/left, willing to supply less at every price
question
Inverse Supply Function
1. Start with the demand function 2. Multiply each term by the number of buyers 2. to find the new demand curve solve for Px.
question
If wages increase, the supply curve
i.e. 6360 - 400Px = -1116 + 300Px
Px = 10.68
question
Aggregate demand curves
The coeff of the slope of the supply curve is positive, the coeff of the slope of the demand curve is negative
question
Equating the supply and demand function will give us equilibrium price (partial equilibrium) full equilibrium includes wages and income.
Buyers keep buying based on an idea that the value will go up
question
When there is stable equilibrium, the coefficients of the supply and demand curve
Qdx = 6360 -400(12) = 1560
Qsx = -1116 + 300(12) = 2484
Excess supply = 2484-1560 = 924
Subtract Qd from Qs
question
When there are bubbles
Subtract Qsx from Qdx
3160-1284 = 1,876
question
Find the excess supply when Px = 12
Competitive and non-competitive bids are entered at different price levels. The price is dropped until all inventory is accounted for. All bids are filled at the last price level. https://image.slidesharecdn.com/wasim-120331103946-phpapp01/95/dutch-auction-20-728.jpg?cb=1333192825
question
Find excess demand when Px = 8
Qdx = 6360 -400(8) = 3160
Qsx = -1116 + 300(8) = 1284
57:52 Surplus
question
Modified Dutch Auction
total expenditure = P * Q
question
Left off at Video one
Use 1/2bh to figure out consumer surplus, height = intercept - price
question
total expenditure
question
consumer surplus on a graph
Change in Q/Change in P will give you the price coeff/slope
question
price ceiling
Qdx = 11,200 - 400(3) = 10,,000
Edpx = -400(3/10,000) = -.12
If the price elasticity of demand is < 1, then the demand is inelastic
question
price floor
the more elastic demand gets, people will buy less at higher prices
question
An increase in taxes shifts the demand curve
demand is not very sensitive
question
Own price elasticity of demand
demand is very sensitive
question
Calculate price elasticity of demand at a price P=3
Qdx = 11,200-400Px
Edpx = 1
question
As price moves up the downward sloping demand curve,
Edx = 0
question
Inelastic
Edx = infinity
question
Elastic
More elastic, people will cut back if price increases
question
unit elastic
Inelastic/less elastic, people will cut back very little if price increases
question
perfectly inelastic
If it's a small part of budget, it's more inelastic, we'll be insensitive to price changes
question
Perfectly elastic
results in greater quantity demanded and an increase in total expenditure
question
If availability of substitutes is high
results in greater quantity demanded and a DROP in total expenditure
question
If availability of substitutes is high
Quantity demand at each price increase by .8% for each 1% increase in income
If EdI > 0 normal good
If EdI < 0 inferior good
question
Elasticity in regards to % of budget a good represents
1. Completeness - consumers know their preferences, they can be ranked
2. Transitivity - Preferences are transitive A>B, B>C, A>C
3. Non-satiation - consumers prefer more
question
When demand is elastic, a fall in Px
MRS = Y/X - the slope of the line, as Towards the right of the indifference curve we are willing to give up very little of the y-axis item to receive a little bit of good x, smaller slope
question
When demand is inelastic, a fall in Px
The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater
question
if Income Elasticity of demand = .8
On an indifference curve, if income goes up, the indifference curve will shift out to the right
question
Utility Theory
We are willing to buy more
question
Graph of Perfect Substitutes
We will consume less of that good
question
Graph of perfect compliment
decreases, demand becomes more elastic, we can buy more for less
question
Marginal Rate of Substitution (MRS)
there will be a substitution effect, more substitutions and income effect, real income increases

Substitution is a movement along the initial indifference curve, income accounts for the rest of the change in quantity
question
The x-intercept on an indifference curve is equal to income/Price of good x, so if the price of good x increase, the x-intercept decreases and the slope of the tangent line becomes greater
There will be more substitutions, we move to the right along the indifference curve, the income effect decreases the quantity we purchase
question
On an indifference curve, if income goes up, the indifference curve will shift out to the right
an inferior good, for which the income effect overpowers the substitution effect where S-I is not greater than 0

A company sells a Pom Pilot, as the price drops for the product people find it less and less attractive to buy
question
If income increase for a normal good
Higher prices indicate to consumers that the good is more valuable, status products
question
If income increases for an inferior good
This is a normal return
question
As price for a normal good decreases, the slope of the line tangent to the distance curve
This is an abnormal return
question
For a normal good, if price drops
Price X Quantity
question
For an inferior good, if price drops
Horizontal, no matter how much it makes it can't effect the price
question
What is a Giffen Good
Total Revenue/ Quantity = Price
question
What is a Veblen good?
When all companies sell identical products, market share does not influence price
question
If accounting profit - opportunity costs = 0 (Opportunity cost is Required Rate of Return)
AFC + AVC (Avg fixed cost + avg variable cost)
The min of the ATC shows the min/cost per unit
question
If accounting profit - opportunity costs > 0
The marginal cost is the change in the total cost that arises when the quantity produced is incremented
question
Total Revenue =
At point a, the firm profit < 0 because price is lower than cost. This is a shutdown point.
question
An individual firm's demand curve is...
At point B, the economic breakeven has been reach, TR=TC, ROE=RRR, above B Accty profit > 0
question
Average revenue =
Short-run | Long-run
Below A - shutdown | Leave
A-T - produce | leave
Above B - produce | stay
question
Perfect competition
MR=MC Firms achieve maximum profits when marginal revenue (MR) is equal to marginal cost (MC), that is when the cost of producing one more unit of a good or service is exactly equal to the revenue derived from selling one extra unit.
question
Production Function
Output or Q
question
Total fixed cost
Quantity/Quantity of Labor
question
Average Total Cost (ATC)
chg in Q/ chg in labor
question
marginal cost curve
The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output. After some optimal level of capacity utilization, the addition of any larger amounts of a factor of production will inevitably yield decreased per-unit incremental returns.
question
Shutdown point
Marginal product of labor is a measurement of a change in output when additional labor is added. However, all other factors remain constant. To calculate marginal product of labor you simply divide the change in total product by the change in labor.
question
Breakeven
Gives us the additional output (units) of product we get for an additional \$1 of labor
question
Summary of cost curve analysis
Gives us the additional output in unit we can get by adding \$1 of capital
question
Profit maximization
Increase output by adding labor until the two are equal
question
What happens to prices in an increasing cost industry, decreasing cost industry and constant cost industry?
What combination of two inputs will allow us to produce something for the least amount of cost.?
We have optimized production when the Marginal Product (MP) of adding one more unit of labor = the marginal product of adding one more unit of capital.
i.e. MP/Price of one unit of labor = Additional Productivity added per unit of labor
\$100 of perfume/\$20 of labor of one human, I get 5 times as much in productivity value
question
total product =
Profit is maximized when MRP/Pl = l
If MRP/l > 1 then add labour
question
avg product =
Look at the sign in front of the price of good B. Qdx = 8.45 - 6.39Px + .25I - 2Py (Py represents price of good B)
Negative = complement
positive = substitute
question
marginal product =
The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce. All firms choose output (quantity) simultaneously.
question
factors of production
The concept that determines the optimal solution in a non-cooperative game in which each player lacks any incentive to change his/her initial strategy. Start by determining the firm with the dominant strategy. The scenario in which one firm will always choose a certain strategy. Then, look at what the other firm would do when the dominant firm chooses that strategy. This will show us the Nash equilibrium.
question
diminishing marginal returns
In the dominant firm model where there is a price leader, all competitive firms follow the price of the leader. The slope of the follower demand curve is steeper than the leader firms demand curve.
question
Marginal product of labor
Sum of the squares of the top 50 firms' market shares
- Higher is closer to monopoly
- Max is 10 000
question
MPl/Pl (Marginal product of labor/price of labor)
Sum of the market share of the n largest firms. Aproblem with this approach is it does not take into account elasticity of demand. When e of demand is high, there is near perfect competition.
question
MPk/Pk (Marginal product of capital/Price of capital)
MC = P(1-1/price elasticy of demand)
40 = P(1-1/1.5)
P = 120
question
If marginal product of labor > marginal product of capital
HHI is an index in which the market shares of n companies are squared and then added. A score of 2500 or higher indicates a high concentration.
question
rule of least cost
old value - new value/ old value
question
Profit maximization of an input
profit is maximized at MR = MC or M/Mc =
MR = MP * P = MRP
MC = P input
negative
question
How do we determine if a good is a compliment or a substitute using the demand function?
positive
question
Courtnot Oligopoly
We demand a lot more of a good when the price of it's compliment or substitute changes a little

We drive 2 more mile for every 1% decrease in the gas price
2:1 = 2
question
Nash Equilibrium
A 2% increase in demand for Crest for every 3% price decrease in the price of toothbrushes
2/-3 = -2/3 which means the good is a compliment
question
Dominant firm model
The price coeff of A * (Price of B/QD of A substituting the price of B)
question
Herfindahl Index
associated with deflation, no matter how much money is pumped into the system, interest rates do not fall and people continue to hoard their money
question
concentration ratio
undefined
question
Calculate the price a company will be most likely to set it's price at given price elasticity of demand 1.5, and marginal cost 40.
undefined
question
HHI Index
undefined
question
Percent Change Formula
undefined
question
A complement will have a blank cross price elasticity of demand
undefined
question
A substitute will have a blank cross price elasticity of demand
undefined
question
When cross price-elasticity of demand is greater than 1
undefined
question
when cross price elasticity of demand is greater than 0
undefined
question
Calculating cross-price elasticity of demand of A
undefined
question
A liquidity trap is
undefined

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