R13 Demand and Supply Analysis Introduction

CFA® Level I – Economics
Demand and Supply Analysis: Introduction www.irfanullah.co 1

Contents
1. Introduction
2. Types of Markets
3. Basic Principles and Concepts

4. Demand Elasticities

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1. Introduction
• Economics is the study of production, distribution, and consumption; it is divided into two broad areas: Microeconomics and Macroeconomics

• Macroeconomics deals with aggregate economic quantities, such as national output and national income
• Microeconomics deals with markets and decision making of individual economic units, including consumers and businesses.

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2. Types of Markets
• Factor markets refers to the markets for factors of production
 Natural resources, mineral wealth, raw materials, labor
 Firms are buyers

• Goods markets refers to the markets for consumer goods and services
 Firms are the sellers
 Intermediate markets are where one firm’s outputs are another firm’s inputs

• Capital markets refers to the markets for long term financial capital
 Borrow money by selling debt instruments
 Sell claims to ownership by selling equity instruments
 Capital markets also include the secondary markets where debt and equity claims are subsequently traded
Example 1 www.irfanullah.co 4

3. Basic Principles and Concepts
• Demand is the willingness and ability of consumers to purchase a given amount of a good or service at a given price.
• Supply is the willingness and ability of sellers to offer a given amount of a good or service at a given price.

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3.1 The Demand Function and Demand Curve
Law of demand: as the price of a good rises, buyers will choose to buy less of it, and as its price falls, they buy more
Demand function for Good A: QD = f(PA, I, PB…)

P

QD = 10 – 0.5P + 0.06I – 0.01PT

QD = 100 – 0.5P
Inverse demand function
P = 200 – 2Q

Demand curve: graph of the inverse demand function

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3.2 Changes in Demand vs. Movements along the Demand Curve