Economic basics and the CFA

Published on July 30, 2020   15 min
Hello and welcome. I'm Professor Michael McDonald. Today I'd like to talk to you about a critical area on the CFA Level 1, chartered financial analysts level 1 exam. That's economics. Let's get started, shall we.
To begin with, when you're talking about economics, the core foundation you always have to start with is supply and demand. Economics is important not only from a theoretical perspective but also because it's the parent discipline for applied real-world areas like, finance and investing. In fact, concepts like supply and demand, normal and inferior goods, substitute and complementary goods are all critical to modern business.
Let's start with the concept of supply. Supply simply refers to the idea of how much of a product businesses and people will make for sale. The supply of a product is determined primarily by how much the product sells for in comparison to how much it costs to make. If for instance, we are talking about say shirts and it costs $10 or 10 pounds to make a shirt, and we can sell that shirt for $20 or 20 pounds, well then, we'll want to make as many shirts as possible. Why? Because we can make a profit on each shirt and it's pretty good profit. If on the other hand, we can only sell a shirt for $11 and it cost us $10 to make. There's not much room for error there. If we have labor expenses turn out be a little bit higher than we thought, or if it costs us extra money to get fabric, whatever, all of a sudden, the cost of that shirt rises and we no longer make a profit. That's the basic idea behind supply.