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CFA Level 1 - Economics

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Types of markets
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Terms in this set (289)
Factor markets = markets for factors of production (land, labor, capital), firms purchase services of factors of production (labor) from households and transform those services into intermediate and final goods and services.

Goods markets = markets for the output produced by firms (legal and medical services) using the services of factors of production, households and firms act as buyers (intermediate goods and services use inputs to produce other goods while final goods and services are in the final form purchased by households)

Capital markets = markets for long-term financial capital (debt and equity), firms can use capital markets to raise funds for investing in business, household savings are the primary source of these funds

Interactions between these markets are voluntary. Whenever the perceived value of a good exceeds the cost of producing it, there is potential for a trade that would make the buyer and the seller better off.
The willingness and ability of consumers to purchase a given amount of a good or service at a particular price. The quantity demanded depends primarily on price, but also on income levels, tastes, and preferences, and prices/availability of substitutes and complements.

Law of demand states that as the price of a product increases (decreases), consumers will be able to purchase less (more) of it.

Demand function for gasoline: QDg = 7.5 - 0.5Pg + 0.1I - 0.05Pa
-an increase in price of gas results in a decrease in quantity demanded
-an increase in income results in an increase in demand
-an increase in the price of automobiles results in a decrease in demand (complements)
-P&Q are endogenous variables, I and Pa are exogenous

Inverse demand function assuming income and automobiles are constant: QDg = 12 - 0.5Pg => Pg = 24 - 2QDg
-graph of the inverse demand function is called the demand curve or MARGINAL VALUE CURVE with Price on the y axis and Q on the x axis
-shows maximum quantity of gas demanded at every given price/highest price willing to pay
-slope of demand curve is the change in price/change in quantity demanded
-change in quantity demanded is a movement along the demand curve in response to price change
-change in income or automobile is a shift in the demand curve or a change in demand

Negatively sloped
Refers to the willingness and ability of producers to sell a good or a service at a given price. Producers are willing to supply output as long as the price is at least equal to the cost of producing an additional unit of output (marginal cost).

Law of supply states that price and quantity are positively related.

Supply function for gasoline: QSg = -150 + 200Pg - 10W
-for every 1$ increase in price, the quantity supplied would increase by 200 gallons
-for every 1$ increase in the wage rate, the producer would be willing to sell 10 fewer gallons due to increase in marginal cost
-P&Q are endogenous variables, W is exogenous

Inverse supply function: QSg = -350 + 200Pg =>
Pg = 1.75 + 0.005QSg
-graph of inverse supply function is called the supply curve or the MARGINAL COST CURVE with price on y axis and quantity on x axis
-shows highest quantity the seller is willing and able to supply at each price and the lowest price the seller is will to supply at each quantity
-slope of supply curve is change in price over change in quantity supplied
-changes in price are movements along the supply curve or change in quantity supplied
-change in labor costs are a shift in the supply curve or a change in supply

Positively sloped
Can be defined in two ways:
1) occurs at the price at which quantity demanded equals quantity supplied
2) occurs at the quantity at which the highest price a buyer is willing and able to pay equals the lowest price that a producer is willing and able to accept

It is the point of intersection between the market demand and supply curves.
When we focus on one market and assume exogenous variables are constant, this is partial equilibrium analysis and it does not account for any feedback effects associated with other markets (versus general equilibrium analysis which includes all feedback).