CFA Notes - Economics

Note

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I. Economics

（1）Demand & Supply

The theory of the consumer deals with consumption (the demand of goods and service) by utility-maximizing individuals (i.e, individuals who make decisions that maximize the satisfaction received from present and future consumption).

The theory of firm deals with supply of goods and service by profit-maximizing firms.

（2）Elasticity

Elasticity is a measure of how sensitive one variable is to change in the value of another variable

i. Elasticity of Demand/Supply

The general model of demand and supply can be highly useful in understanding directional changes in prices and quantities that result from shifts in one curce or the other.

Often, though, we need to measure how sensitive quantity demanded or supplied is to changes in the independent variable that affect them.

This is the concept of elasticity of demand and elasticity of supply.

ii. Extension

Income Elasticity 收入弹性

Elasticity Coefficient 弹性系数

Plane Elassticity 平面弹性

Cross Elasticity 交叉弹性

iii. Discretionary 自由决断

Case of Elasticity

iv. Property

Perfect Elastic 完全弹性

eg. (General) Food, (General) Transpotation Tool

Perfect Inelastic 完全无弹性

eg. (Specific) Food, (Specific) Transpotation Tool

Elastic 完全弹性（>1）

降价促销有用

Inelastic 完全无弹性（<1）

降价促无用

v. Elasticity and Total Expenditure

vi. Prediciting Demand Elasticity

Close substitutes $\rightarrow$ Highly elastic

Small Budget $\rightarrow$ Less elastic

Budget percentage

Long/Short-run/term $\rightarrow$ Highly/Less elastic

（3）Normal Goods/ Inferior Goods

i. Income elasticity of demand

Income elasticity of demand is defined as the percentage change in quantity demanded ($\% \Delta Q dx$) divided by the percentage change in income($\% \Delta I$), holding all other things constant.

ii. Normal goods

Goods with positive elasticity are called "normal goods".

iii. Inferior goods

Goods with negative income elasticity are called "inferior goods".

iv. Example Case

（4）Cost

i. Opportunity Cost

Definition

Example Case

ii. Explicit / Implicit Cost

Definition

An explicit cost is a direct payment made to others in the course of running a business, such as wage, rent and materials, as opposed to implicit costs, which are those where no actual payment is made.

While management will utilize explicit costs when viewing business operations, implicit costs are only utilized in decision-making or choosing between multiple alternatives.

Example Case

iii. Fixed / Variable Cost

Definition

Fixed cost(FC) is the expenses that do not change as the level of production varies. Variable cost(VC) is the variable expenses. VC rises with increased production and falls with decreased production.

At zero production, total cost(TC) is equal to FC because VC at this output level is zero.

Example Case

每个月支付的房租再合同期内都是固定成本。或者每个月要偿还的房贷也是固定成本（假设是固定利率）

每个月买新衣服的费用、打车的费用都可以算作是可变成本。

iv. Marginal Cost

（5）Economic Welfare

i. Economic Welfare

Broadly, economic welfare is the level of prosperity and standard of living of either an individual or a group of persons. In the field of economics, it specifically refers to utility gained through the achievement of material goods and services.

ii. Consumer Surplus

Definition

Consumer surplus is defined as the difference between the value that a consumer places on the units purchased and the amount of money that was required to pay for them. It is a measure of the value gained by the buyer from transaction.

Explanation

To get an intuitive feel for the concept of consumer surplus, consider that the last thing you purchased. Whatever it was, think of how much you actually paid for it. Now contrast that price with the maximum amount you would have been willing to pay rather go without the item altogether. If those two numbers are differnt, we say you received some consumer surplus from your purchase.

Figure

Note : Consumer surplus is the area beneath the demand curve and above the price paid.

iii. Producer Surplus

Explanation

If a rice producer can produce a bag of rice for four dollars, and she received six dollars per bad when she sells her rice, then her level of producer is equal to two dollars. Producer surplus is price received minus the cost of production.

Figure

Note : Producer surplus is the area beneath the price and above the supply curve.

iv. Total Surplus

Total surplus = Consumer surplus + Producer surplus

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（6）Revenue & Profit

i. Total Revenue

For a market, the total expenditure by buyers becomes the total revenue(TR) to sellers in that market.

TR is the same from both an accounting standpoint and an economic standpoint; it is derived by multplying the selling price per unit of output(P) by the number of units(Q):

$$TR = (P)(Q)$$

ii. Average Revenue

A firm's average revenue(AR), or revenue per unit, is equal to price per unit(P).

$$AR \equiv P$$

iii. Marginal Revenue

Marginal revenue(MR) is the additional revenue the firm realized from decision to increase output by one unit per time period. That is,

$$MR = \frac{\Delta TR}{\Delta Q}$$

iv. Economic Profit

Economic profit is defined as the difference between total revenue(TR) and total economic costs.

$$Economic \ Profit = Total \ Revenue- Total \ Economic \ Costs$$

$$Normal \ Profit = Zero \ Economic \ Profit$$

v. Accounting Profit

Accounting profit is the difference between TR and total accounting cost. The difference between two measures of profit, lies in the understanding of economic cost also called "opportunity cost".

$$Accounting \ Profit = Total \ Revenue- Total \ Accounting \ Costs$$

当经济利润 = 0 时，总收入 = 经济成本， 此时的会计利润被称为是正常利润

（7）Substitutes & Complements

i. Cross-Price Elasticity of Demand

ii. Substitutes

For some paris of goods, X and Y, when the price of Y rises, more of good X is demanded; the cross-price elasticity of demand is positive. Those goods are referred to as substitutes.

iii. Complements

Alternatively, two goods whose cross-price elasticity of demand is negative are said to be complements.

（8）Demand & Supply

III. Inflation

（1）Inflation Rate

（2）Hyperinflation

（3）Stagflation

（4）Deflation

（5）Disinflation

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