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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Q
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3.2 Changes in Demand vs. Movements along the Demand Curve
Demand and Supply Analysis: Introduction www.irfanullah.co 1
Contents
1. Introduction
2. Types of Markets
3. Basic Principles and Concepts
4. Demand Elasticities
www.irfanullah.co
2
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.
www.irfanullah.co
3
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.
www.irfanullah.co
5
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
www.irfanullah.co
Q
6
3.2 Changes in Demand vs. Movements along the Demand Curve