For Level I CFA exam candidates, macro and microeconomics can be tricky topics. That’s why the prerequisite readings are so important to cover and understand.
To help, Wiley CFA Program Exam Review is making available for free three key readings containing over 80+ pages of study text with examples, figures, and coverage of the original Learning Outcome Statements set by the CFA Institute.
In this free Study Guide, you’ll learn:
LOS a: Distinguish among types of markets.
• Final goods and services are goods in the final form purchased by households.
Generally speaking, market interactions are voluntary. Firms offer their products for sale if they believe that they will fetch a price that exceeds costs of production. Households purchase goods and services if they believe that the utility that they will derive from the good or service exceeds the payment required to obtain it. Therefore, whenever the perceived value of a good exceeds the cost of producing it, there is potential for a trade that would make both the buyer and the seller better off.
Figure 2-3: Elastic and Inelastic Responses to a Decrease in Price
Case 2: Changes in Price
Now we assume that the price of milk remains constant and that of chocolate decreases. A decrease in the price of chocolate results in an increase in the horizontal intercept (x‐intercept) of the budget constraint, while the vertical intercept (y‐intercept) remains the same. Figures 2-3a and 2-3b illustrate two types of responses that the consumer may have to this decrease in the price of chocolate.
In this reading we assume that the primary objective of the firm is to maximize profits. Generally speaking, profits are calculated as the difference between total revenue and total costs. Total revenue is a function of the selling price and quantity sold, which are both determined by demand and supply in the market for the good produced by the firm. Costs are a function of the level of output, the efficiency of the firm’s production processes and resource prices (which depend on demand and supply in resource markets).
Accounting profit (also known as net profit, net income, and net earnings) equals revenue less all accounting (or explicit) costs. Accounting costs are payments to nonowner parties for goods and services supplied to the firm and do not necessarily require a cash outlay. Accounting profit (loss) = Total revenue − Total accounting costs.
Economic Profit and Normal Profit
Economic profit (also known as abnormal profit or supernormal profit) is calculated as revenue less all economic costs (economic costs include explicit and implicit costs). Alternatively, economic profit can be calculated as accounting profit less all implicit opportunity costs that are not included in total accounting costs.
Economic profit = Total revenue − Total economic costs
Economic profit = Total revenue − (Explicit costs + Implicit costs) Economic profit = Accounting profit − Total implicit opportunity costs