# CFA EXAM STUDY SESSION 4

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1. What are factor of production markets vs services and finished goods? What are intermidate goods? Capital Markets?
Typicaly factor of production (oil labor) are markets where companies are buyers and finished goods (cars, clothing, etc) is where markets where companies are sellers.

Intermediate goods are good used in production of final goods (INTEL COmputer chips)

Capital markets are where firms rais money through equity offering or raising debt, as well as wehre these markets are traded
2. The law of Supply? Law of Demand?
The fact that a greater quantity is supplied at higher prices is referred to as the law of supply.

Demand - Quantity demanded typically increases at lower prices.
3. Which quartile and what way (signage) is a demand curve? Supply curve?
Deman is 3rd quartile negative. Supply is 3rd Positive.
4. What happens with Excess Supply and Excess Demand?
Excess Supply - Price is above equilibrium levle, quantity willingly supplied exceeds quantity consuemr willing to purchase and excess supply results

Demand- We have a price lower than equilibrium, quantity demanded exceeds quantity supplied, drivering up prices to compete for available supply.
5. What is a stable equilibrium? Unstable?
When forces that move price and quantity towards equilibrium values when they deviate from those values. An u nstable equilibrium is when the supply curve is less steeply sloped than the demand curve.
6. How do you get the Demand/ Supply Curve Slope?
Use the Inverse of the Demand/Supply curve equation
7. How do you figure out excess demand/supply and equilibrium price?
Set the demand and supply equations equal to each other for equilibrium. For excess, just sub in the same variable for Demand and supply and see which one is more
8. Common value auction? Privat value auction? Winner's curse?
Common Value Auction where everybody knows the value of the item to be auctioned is the same, but bidders do not know value at the time of the auction and must bid based on estimates of error. Whoever overestimates the value the most wins. This can be winners curse bc sometimes estimate is an overestimate and actually end up losing money.(oil wells)

Private value, also refered to as an english auction, bidders bid more than the next person, and bidder first offering highest bid wins item and pays amount.
9. sealed bid auction? Second price sealed bid auction (vickery auction)? Descending price auction(Dutch Auction)
Each bidder provides one sealed bid. (posting system japanese baseball) Reservation price is highest price bidder is willing to pay.

Secon Price, same as sealed, but highest ibdder pays amount bid by second highest bidder.

Descinding price - begins with price greather than what bany bidder will pay, and offer price is reduced untila bidder agrees to pay, if multiple units winning bidder specifys, and the remaining are left for descending price. Modifed dutch auction is when everyone must pay the same price as the highest bidder.
10. Consumer Suprlus? Producer Surplus?
The difference between the total value to consumers of the units of a good that they buy and the amount they must pay.

Excess of market price above the opporunity cost of production (total revneue minus variable cost of producing)
Reduction in consumer and producer surplus due to underproduction or overproduction.
12. Obstacles to efficient allocation of resources include? Price contro, tasxes and trade, external costs, external benefit, public goods and common resources.
-Price controls (price ceilings, price floors) rent control minimum wage

-Tax and trade restrictions (subsidies and quotas). Taxes increase amt buyers pay, and decrease amt sellers get. Subsides increas amount seller receive and decrease price for buyers. Quotas, are lmits of production.

-Exteranl costs - imposed on others by production of goods not taken into acct in prodution decision. exampel are costs imposed on fsherman by a firm that pollutes ocean as part of prodcution process. Societal costs greater than direct costs of production for producer.

External benefits- benefits of consumption enjoyed by people besides buyer of goods. Example is tropical garden on ground of industrial comples. Developer considers marginal benefit to the firm. Equilibrium quantity produced and consumed is less than efficient quantity.

-Public goods, are goods and services consumbed by people regardless of whether or nothe they paid for them. like national defense. Production is greater than the efficient amount.

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13. Price ceilings below equilibruim do what?
create deadweight loss. Cause people to wait in lines, opportunity cost is time. Suplliers may engage in discrimination 9selling to friends). Officially sell at ceiling price but take bribes to do so. Also may reduce quality of goods.
14. What is equilibrium in the labor market called?
Wage Rate
15. What happens if supply are less elastic than demand?
Suppliers will bear a higher burden.
16. What is Elastic and Inelastic of Demand?
Inelastic is a good that can't be substituted ( as price increases quantity stays the same). Vertical on the Price- Quantity scale. Elastic is a good that can be substituted for easily (as Quantity increase price stays the same.
17. How do you find Demand Elasticity? What is a unitary elasticity? What is a high elasticity vs low elasticity?
(change in quantity/Quantity at 0)/(Change in price/Price at 0) or (Price at 0)/(Quantity at 0) * (Change in Quantity/Change in Price) where change in quantity over price is coefficient of (price).

-Increase in price from -1 means High elasticity bc percentage decrease in quantity demanded is greater than percentage increase in price. Equates to a higher number less than -1 i.e. -2 -3
18. What factors effect demand elasticity?
• -Quality
• -availability of substitutes
• -Portion of income spent on a good (larger proprtion of income spent on good, more elastic deman will be) When toothpaste price increases, won't swithc goods. If houseing costs increase, more likely to adjust consumption.
• -Time - Elasticity of demand tends to be greater the longer the time perioid since price change. If price of heat goes up, people will just turn down thermostat. In the long run, however, people will get smaller living quarters, innovation will arise, etc.
19. What is Income Elasticity? Normal Good? Inferior good? Does Income Elasticity Differ over some ranges of income?
Income elasticity is sensitivit of quantity demanded to change in income.

-Most goods are termed normal goods bc as income increases, so does quantity demanded. Inferior goods are goods when income increases demand decreases.

-For some cases, yes. As you get more money you're demand for airline travel will probably increase. However, once you get to a certain point of income, you stop flying commericial and get your own private jet, making the income become inferior.
20. What is cross price elasticity?Substitute?Compliment?
Percent change in quantity demanded of a good to percent change in price of a related good.

Substitute is when price of related good increases and quantity demanded of your good increases, meaning that they are substitues.Bread A and B are subs. If price in A increases, Quantity demanded of B increases.

• -When price of a related good increases
• and quantity demanded of your good decreases then it is a substitute.
21. How do you get demand or supply curves?
Inputting all variables besides Price and inverting demand function equation gives you demand curve.
22. Chages in quantity demand in response to a change in price represent what?
a change in the demand curve
23. changes in demand refer to shifts in a demand curve
24. Shifts in demand postive are which way? supply? what factors affect a postitve shift in demand for both?
Shift in demand postive shift demand curve to the right. Supply is also shifted to the right.

Demand is determined by increase in income, inreas in prcie of substitued goods, or decrease in complementary goods.

Supply is increased by advances in production technology and by decreses in input prices.
25. If cross price elasticity is greater than 0? less than? if income elasticity is greater than 0 less than? Own price elasticity is greater than what number? less than, means what?
Own price elasticity greater than 1, demand is elastic, less than demand is inelastic.

Cross Price greater tahn 0 substitue. Less than complement.

Income elasticity greater than 0 good is normal, less than 0 good is inferiro.
26. change in quantity of supply is based on price. Change of supply is based on factors.
27. On what scale NOIR is utility measured?
Ordinal.
28. Indifference curves follow certain rules
• 1. Slopes is downward
• 2.Convex toward origin - When person has more units of x and less of y, he's willing to give up more x to get a y
• 3. Inddiference curves can not cross.
29. Normal Good. Inferior Good. Giffen god.Veblen good?Difference between Giffen and Veblen?
• Normal good- when Income effect is positive.
• Inferior good- income effect is negative, but substituion effect is a greater positive.
• Giffen Good - Income effects is negative and greater negative than substituion effect is positive.

Veblen good - one for which a higher price makes the good more desirable (think Gucci bag)

Giffen is a negative income effect, while veblen is not. Second, existnece of giffen goods is theoretically supported by our rules of consumer choice while veblen is not
30. Accounting profit? Economic Profit?
Accounting Profit is just revenue minus expenses (explicit costs that represent actual payments for the resources the firm uses in producing its output.

Economic profit /Abnormal profit - equal to accounting profit less implicit costs (opportunity cost of resources supplied to firm by its owner.
31. Normal Profit?
accounting profit that makes econmic profit zero. ecnomic profit = accounting profit-normal profit=0.
32. Economic Rent
Difference between earnings and opportunity cost. When supply curve is elastic, no economic rent. When inelsetic supply results in greats ecnomic rent.
33. Marginal Revneue?
Difference in Total Revenue of selling more unit of something.
34. What does demand curve look like in perfect competition. Unperfect?
Perfect is postive with price, average price, and marginal price all equal.

In unperfect, deman curves are negative, so greater sold decreases price. Marginal revnue is less than average revenue and price.
35. Factors of production? For economic analysis which one's do we look at?
Factors of production are Cost of materials, Cost of land, labor, and capital (physical capital or plant and equipment firm uses in production).

For economic analysis we many times just group capital and labor.
36. What is AFC and which way does it go as more units produced? AVC?ATC? When are AVC and ATC at their minimums?
Average fixed cost, goes down as mroe units produced.

Average variable costs, first goes down, then eventually goes up.

Average Total Cost, alwasy goes up.

AVC and ATC are at minimum when equal to marginal cost.
37. What is the Long Run Average Total Cost curve? What is a downard sloping segment? Downward? In perfect Comptition where will firms operate on this scale eventually?
It shows the minimum average total cost for each level of output.

A downard slping scale means econmies of scale, upward is diseconomies..

The mimium efficient scale.
38. What is profit maximizing quantity of ouput?
Where the difference between total revenue and total cost is amaximum. Where marginal cost equals amrginal revenue. A firm should always increas production as long as marginal cost is less than marginal revenue.
39. Decreasing cost industry. Constant. Increasing?
Decreasing cost industry is as ouput increases, input factors prices decrease, result is a negativley sloped long run industry supply curve. Example flat screen TV industry.

Constant is input factors stay the same.

Increasing is as ouputs increase input prices increase. For example oil. Postivle sloped supply curve.
40. What is TPL(Total Product of Labor) how do you get it? MPL? APL? Diminishing margina returns or decreasing marginal productivity?
Total Product of labor is total ouput of a firm that uses specific amount of capital.

Marginal prodct of labor is additional ouput produced when one more uniot of labor is employed. APL is the TPL divided by the total number of units of labor.

• MPL increases intiially as output increases at first. As labor is increased beyond a certain quanity, th e incremental ouput from each worker declines. This is called Dimninshing marginal returns or ...
• A firm should hire employees until MRP is equal to wage.
41. Optimal combination of labor and capital inputs is reached how?
• when ratio of marginal product of capital to cost is equl to parginal product of labor to its cost. MPcapital/pcaptal = MPlabor/Plabor.
• If the capitla rate is less than labor rate, you can get the right costs so that these two are eqaul. In this case you would just increase labor.
42. Perfect Competition, Monopolistic compeition, oligopoly markets, an monopoly is charachertized by? Quantity of firms, barriers to entry, nature of products, nature of competitors and pricing power.
Perfect Competition - Lot of competiion, low barriers to entry, products are very good substitues for one another, price only, no pricing power.

Monopolistic competion - Lot of competition, low barriers, products are good substitues but differentiated a bit, price advertising and quality, low pricing power

Oligopoly - Few competition, high barriers, products are good subs or differentiated, price advertizing quality, good pricing power.

Monopoly - one firm, high barriers, no substitues, advertising, pricing poewr is extremely high
43. Perfect competition equilibrium is? elasticity of demand?

Monopolistic, Oligarchy, Monopoly
• Perfect:Price=marginal revenue=marginal cost
• Perfectly Elastic demand, zero economic profit in equilibrium
• Monopolistic comp: Price>Marginal Rev=Marginal Co
• st
• Elasticity is fairly high , zero economic profits in long run

• Oligopoly: Price>Marginal Rev=Marginal Cost
• Elaticity>1 but mayve have positive economic profit in long run, altho moves toward zero profit over time

• Monopoly: Price>Marginal Rev=Marginal Cost
• Elasticity>1, 1 but mayve have positive economic profit in long run, may be 0 bc of expenditures to preserve monopoly
44. Under perfect comp, what is short and long run supply curve.
Short run supply curve is portion of firms short run marginal cost over average variable cost. Long run is marginal cost curve over total average cost.

Monopolistic, competition, oligoppoly and monopopply do now have well defined supply curves, so neither curves are supply curves.
45. A concentration of N firms is calculated how? Herfindahl-Hirschmn Inde? What's the issues and point of these?
Concentration is taking top N firms and summing them. When a merger happens you redo including merger numbers.

For HRH index, you take the square of the top N firms and see the difference in impact before and after merger

These are to see how concentrated within the top N firms an industry is. Neither measure actually measure market power dirctly. Bothc an be misleading measures of market power when potential competition restricts pricing power.
46. What do you want all Marginal Products/ dollar of resource (Marginal Phyusical Product) to equal? What do you want all marginal revenue products to equal(MRP)?
You want all MP's to equal each other. if not, condition for cost minimation is not met. Higher MP's, need more, while lower MP's need less.

You can check by how much using MRP. You want all MRP's to equal 1. If over 1, you employ more of that resource and less of resource that's under 1
47. In short run of a price taker what is short run in which economic profit is maximized?
Marginal revenue equals marginal cost. Additionally, when total Profit is over total cost by the max amount.
48. Long run equilibrium level for perfectly competitive firms is where? MR MC ATC
MR=MC=ATC, where ATC is at a minimum.
49. Short Run supply curve for a perfectly competitive firm is what?
The Marginal Cost line above the AVC line. This is bc below it the firm will not mainatin operations.
50. In perfectly competitve market does what? Take through progression? permanent increanse in demand/ normal increase
Increases price, meanign greater profits, and higher output to maximize. Atr higher ouput level, will earn ecomoic profits, but in the long run, some firms will increase scale of operations, adn new firms enter industry. In response to demand decreasing, prices and quantity will fall, and companys will exit or scale down their operations.

In permanent change in demand long run as deman dgoes up, profits go up (price>ATC), more firms enter/ firms produce more. This causes a shift in supply in the market, and firms will gradually move to economiic profit reducing price back to original level. (P=ATC)

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 Author: ckcards33 ID: 130072 Filename: CFA EXAM STUDY SESSION 4 Updated: 2012-02-03 21:48:32 Tags: CFA EXAM STUDY SESSION Folders: Description: CFA EXAM STUDY SESSION 4 Show Answers:

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