CFA Level I Microeconomics and Macroeconomics (Part I)

Economics is a social science which studied the production, distribution, and consumption of goods and services which divided into two broad areas such as Microeconomics and Macroeconomics. Microeconomics is a study that focuses on an individual’s decision making on resources allocation to satisfy their needs and wants within the economy, such as households, workers, and business. The main subjects in Microeconomics include the theory of demand, the theory of the firm, demand for labour and other factors of productions.

While for macroeconomics, it studied the behaviour and performance of the economy as a whole. For examples, macroeconomics analyses the aggregate changes in the economy such as unemployment, growth of production, gross domestic products (GDP), inflation, deficits, level of exports and imports. Both of the microeconomics and macroeconomics are interdependent and complement.

Reading 14 Topics in Demand and Supply Analysis

In this reading, candidates must able to familiar with the basic concepts of demand and supply. Demand is referring to the consumer’s desire to purchase the goods and services and willingness to pay the price for specific products or services. When the cost of goods increases, the quantity demand of the goods will decreasing, vice versa. Besides, candidates are also able to learn several theories such as Marginal Utility Analysis, Indifference Curve Analysis and Revealed Preference Theory. While for Supply is referring to the willingness and ability of the producers to supply goods and services to the market. Supply is positively related to the price given because the higher the rate, the people more willing to provide more, which may help to increase the revenue and profits. Both supply and demand are interrelated; from this reading, candidates can explore more on how the buyers and sellers interact to determine the transactions of the prices and quantities.

Besides, candidates are also able to learn on how to differentiate between Substitution effect versus Income effects, Normal goods versus Inferior Goods, Breakeven versus Shut down points of productions, etc. The ways to interpret the price, income, cross-price elasticity of demand, factors that affect each measure, how the economies of scale and diseconomies of scale affect the cost will be discussed in the textbook provided with the examples.

Reading 15 The Firm and Market Structure 

In this reading, candidates can have a better understanding of market structure. Market structure is essential because an individual can learn the skills of analysing issues such as the firm’s pricing of its products, which will bring potential to increase profitability. In the highly competitive market, long-run profits will be driven down by the forces of competition. While for the less competitive markets, large profits are possible even in the long run. Therefore, by understanding the forces behind the market structures can helps financial analysts to determine the short-term and long-term prospects of a firm.

Besides, candidates are also able to learn on how to analyse the demand, supply, optimal price, output and factors that can affect the long-run equilibrium for perfect competition, monopolistic competition, oligopoly and monopoly. The relationship between the price, marginal revenue, marginal costs, economic profits, and the elasticity of demand under each market structure, also will be discussed in the textbook, together with some examples.

Reading 16 Aggregate Output, Prices, and Economic Growth

In reading 16, candidates will have a better understanding of Gross Domestic Product (GDP) and related measures of domestic output and income. Gross Domestic Product (GDP) is a primary indicator which used to gauge the economic health of a country. It measures the aggregate income earned by all households, companies, governments, the flow of output and income in the economy. GDP can be determined in different manners, such as an income approach and expenditure approach. In the income approach, GDP is calculated as the total amount earned by the households and companies in the economy. The income approach formula to GDP as follows:-

GDP = Total National Income + Sales Taxes + Depreciation + Net Foreign Factor Income

Note:
Total national income is equal to the sum of all wages plus rents plus interest and profits.

While in the expenditure approach, GDP is calculated as the total amount spent on the goods and services that had been produced in the economy within a given period. The formula of the expenditure approach for GDP is as follow:-


GDP = Gross Private Consumption Expenditures (C) + Gross Private Investment (I) + Government Purchases (G) + Exports (X) – Imports (M)

Besides, candidates are also able to learn on how to distinguish the differences between sum-value added versus the value of final output methods, nominal GDP versus real GDP, GDP deflator, national income, personal income and disposable income. Furthermore, candidates are also able to learn all the relationship between savings, investment, fiscal balance and trade balance from this reading. The types of macroeconomics equilibrium, long-run full employment, short-run recessionary gap, short-run inflationary gap and short-run stagflation also will be discussed in the textbook together with some examples provided.

Reading 17 Understanding the Business Cycle

In this reading, candidates can know more about what are the changes in economic activity, and the factors affect it. For examples, changes in population, technology and capital are the factors that affect the long-term sustainability of economic growth. However, the short-term economic fluctuations can lead by specific factors such as money supply and inflation.

Besides, candidates are also able to learn how to describe the business cycle and its phases. A business cycle is an economic cycle or trade cycle which can be used to describe the rise and fall in the production of the output of goods and services. The business cycle is useful because it can help an investor to make their investment decision. There are four stages in the business cycles such as expansion, peak, contraction and trough. In the textbook for this reading, candidates also can learn how the different of the economics school of thought interprets the business cycle and their recommendations with it.

Last but not least, candidates are also able to know what are the differences between inflation, hyperinflation, disinflation and deflation. The basic concepts concerning about the types of unemployment, construction of indexed used to measure inflation, cost-push inflation versus demand-pull inflation, and a set of economic indicators will be discussed in the textbook together with the examples provided.

Conclusion

In conclusion, the key considerations such as demand and supply, global trade flows, market structure, business cycle, etc are beneficial to help in conducting own investment analysis and economic forecasting. For the other readings that include in Microeconomics and Macroeconomics, we will discuss on the next coming articles which I will be categorised as Microeconomics and Macroeconomics (Part II).

Written by Stella Goh | 2nd July 2019.

Leave a Reply

Your email address will not be published. Required fields are marked *

Site last updated October 10, 2019 @ 1:39 am; This content last updated July 3, 2019 @ 2:37 am