1 / 82

CFA Level I- Economics

CFA Level I- Economics. Study Session 4 “Microeconomic Analysis” 13. Demand & Supply Analysis: Introduction 14.Demand & Supply Analysis: Consumer Demand 15.Demand & Supply Analysis: The Firm 16.The Firm & Market Structures. Definition of Market. Group of buyers & sellers.

rusk
Télécharger la présentation

CFA Level I- Economics

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. CFA Level I- Economics

  2. Study Session 4 “Microeconomic Analysis” 13.Demand & Supply Analysis: Introduction 14.Demand & Supply Analysis: Consumer Demand 15.Demand & Supply Analysis: The Firm 16.The Firm & Market Structures

  3. Definition of Market Group of buyers & sellers Aware of each other Able to agree on a price For Exchange of Goods and Services www.fintreeindia.com

  4. Four Types of Market Structures Perfect Competition Monopolistic Competition Oligopoly Mono-poly www.fintreeindia.com

  5. Number of Sellers in Market Degree of product differentiation Factor that determinemarket Structure Power of sellers in determining Price Barriers to entry and exit Degree of non Price Competition www.fintreeindia.com

  6. Four Types of Market Structures Perfect Competition Monopolistic Competition Oligopoly Mono-poly www.fintreeindia.com

  7. Perfect Competiton No. of Sellers Many Product Differentiation Homogen-eous Barriers to Entry Very Low Pricing Power of Firm None Non price Competition None

  8. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  9. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  10. Price Elasticity of demand Demand Analysis • There is a negative relationship between Price and Quantity Demanded • Convention in CFA curriculum: use absolute values • Ep = - (% change in Qd) (% change in Price) www.fintreeindia.com

  11. Price Elasticity of demand Demand Analysis Price elasticity depends on: • Availability of substitutes • Share of consumers budget spent on item • Length of the time considered Elastic Ep > 1 Inelastic Ep < 1 Unitary Elastic Ep = 1 www.fintreeindia.com

  12. Price Elasticity of demand Demand Analysis Elastic Ep > 1 Inelastic Ep < 1 Unitary Elastic Ep = 1 Increase in Price  Result in lower TR Increase in price Result in Higher TR Change in price will have no impact on TR www.fintreeindia.com

  13. Demand Analysis Two extreme case of price elasticity of demand Perfectly Elastic Demand Ep = Infinity Perfectly inelastic Demand Ep = Zero Price Price Demand Curve A perfectly Competitive firm is a Price Taker Demand Curve Qty Qty www.fintreeindia.com

  14. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  15. Demand Analysis Income Elasticity When Consumer income increases demand increases • Ey = • For normal goods- It’s positive • Inferior goods - Negative (% change in Qd) (% change in Y) www.fintreeindia.com

  16. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  17. Demand Analysis Cross Price Elasticity Shows change in demand for product A for a change in price for Product B  Ex = • For Substitutes – Positive • For Complements – Negative (% change in QdA) (% change in Pb) www.fintreeindia.com

  18. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  19. Demand Analysis Consumer Surplus • Difference between value and price www.fintreeindia.com

  20. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  21. Supply Analysis • Supply curve of Individual firm – positively Sloped • Industry Supply curve – Positively Sloped • As price increases, quantity supplied increases www.fintreeindia.com

  22. Supply Analysis  a firm’s short-run supply curve is the portion of the firm’s short-run marginal cost curve above average variable cost.  A firm’s long-run supply curve is the portion of the firm’s long-run marginal cost curve above average total cost.

  23. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  24. Optimum Price and Output • Optimum price and output is calculated by equating demand and supply function • Important for Exams: It is possible in a perefectly competitive market , that the demand schedule of the entitre market is downward sloping • In Perefectly Competitive markets, for a Individual firm: Price = Average Revenue = Marginal Revenue www.fintreeindia.com

  25. Optimum Price and Output Certain Basic concepts: • Both MC and ATC curves are U Shaped • Demand Curve is also called as MR Curve • In perfect competition MR = P = AR • Profit is maximised when MR = MC • So for a perefectly competitive firm • MR = P = AR = MC, hence economic Profit = Zero www.fintreeindia.com

  26. Price Marginal Cost Average Total Cost Firms Demand The point where, ATC and MC are same, ATC is lowest Quantity

  27. Perfect Competiton 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Price Elasicity Cross price Elasticity Income Elasticity Consumr Surplus 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  28. Four Types of Market Structures Perfect Competition Monopolistic Competition Oligopoly Mono-poly www.fintreeindia.com

  29. Monopolistic Competition No. of Sellers Many Many Product Differentiation Homogen-eous Differenti- ated Barriers to Entry Low Very Low Pricing Power of Firm None Some Advt + product Differen. Non price Competition None

  30. Monopolistic Competiton 3.Optimal price and Output 1. Demand Analysis 2. Supply Analysis 4. Factors affecting long run equilibrium www.fintreeindia.com

  31. Monopolistic Competiton 3.Optimal price and Output 1. Demand Analysis 2. Supply Analysis 4. Factors affecting long run equilibrium www.fintreeindia.com

  32. Demand Analysis • Each product sold in monopolistic competition is different • Demand curve for each firm is downward sloping to the right • At higher prices- Demand is more elatic • At lower prices- demand is less elastic www.fintreeindia.com

  33. Monopolistic Competiton 3.Optimal price and Output 1. Demand Analysis 2. Supply Analysis 4. Factors affecting long run equilibrium www.fintreeindia.com

  34. Supply Analysis  Supply curve – not represented by marginal cost curve • Imp: In monopolistic competition there is no well defied supply schedule www.fintreeindia.com

  35. Monopolistic Competiton 3.Optimal price and Output 1. Demand Analysis 2. Supply Analysis 4. Factors affecting long run equilibrium www.fintreeindia.com

  36. Optimal price and output • Output is determined where MR = MC • But the price is charged based on market demand schedule. www.fintreeindia.com

  37. Price Short run ATC Short run MC Demand Curve MR Quantity

  38. Optimal price and output • Is imperfect competition a bad thing? www.fintreeindia.com

  39. Monopolistic Competiton 3.Optimal price and Output 1. Demand Analysis 2. Supply Analysis 4. Factors affecting long run equilibrium www.fintreeindia.com

  40. Factor affecting long run equilibrium • An increase in demand will increase  economic profits in the short run under all market structures. • Positive economic profits  result in entry of firms into the industry unless barriers to entry are high. • Negative economic profits result in exit of firms from the industry unless barriers to exit are high.

  41. Factor affecting long run equilibrium • Important concept for Exams: • Unlike long run equilibrium in perefect competition, in monopolistic competition, equilibrium position is at a higher level of average cost than the level of output that minimizes cost.

  42. Monopolistic Competiton 3.Optimal price and Output 1. Demand Analysis 2. Supply Analysis 4. Factors affecting long run equilibrium www.fintreeindia.com

  43. Four Types of Market Structures Perfect Competition Monopolistic Competition Oligopoly Mono-poly www.fintreeindia.com

  44. Oligopoly No. of Sellers Many Few Many Product Differentiation Homogen-eous Differenti- ated Homogen-eous Barriers to Entry High Low Very Low Some or considerable Pricing Power of Firm None Some Advt + product Differen. Advt + product Differen. Non price Competition None

  45. Oligopoly 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Pricing interdependence Cournot Equilibrium Nash Equilibrium 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  46. Oligopoly 2. Supply Analysis 1. Demand Analysis 3.Optimum price and output Pricing interdependence Cournot Equilibrium Nash Equilibrium 4. Factors Affecting Long run Equilibrium www.fintreeindia.com

  47. Demand Analysis • There are three basic pricing startegies in oligopily 1. Pricing interdependence 2. cournot assumptions 3. Nash Equilibrium www.fintreeindia.com

  48. Demand Analysis • Pricing interdependence • Competitors will match a price reduction but ignore a price increase Therefore given a price: • If Price Decreased  Price elasticity Less • If price Increased  price elasticity is Higher • Which results in a Kinked Demand Curve www.fintreeindia.com

  49. Price Demand Curve Quantity

  50. Demand Analysis 2. Cournot Assumption • Each firm will determine it’s profit maximising production level, Assuming, that other firms output will not change. Two Implications: • Output is greater than monopoly, but lower than perfect competition. • Price is lower than monopoly, but not as low as with perfect competition. www.fintreeindia.com

More Related