Eco Notes (CFA520) - Economics [CFA520] 1. The tendency of...

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1. The tendency of the market prices to direct individuals pursuing their own interests into producing activities that also promote the economic well being of the society is referred to as the invisible hand principle. 2. Opportunity cost is the highest valued benefit that must be sacrificed as a result of choosing an alternative. 3. Partial equilibrium analysis: each product or factor market is considered as independent and self- contained for a proper explanation of the determination of price and quantity of a commodity or a factor. 4. General equilibrium analysis: considers simultaneous equilibrium of all the markets taking into account all effects of changes in price in one market over other. 5. Price elasticity of demand (e p ) = % change in quantity demanded = dQ X P % change in price dP Q 6. Cross price elasticity of demand: % change in the Q demanded of a good due to a change in the P of another good. For substitute goods dQ i /dP j is +ve and for complementary goods it is –ve. 7. Relation between marginal revenue (MR), average revenue (AR) and price elasticity (e p ) MP = AR { 1 – 1/| e p |} ; here e p is always –ve. (differentiating R=P.Q wrt Q) 8. Engel curve: captures the changes in the quantity demanded due to change in the income of the customer. 9. Normal goods have +ve income elasticity whereas inferior goods have –ve. 10. Luxury goods: income elasticity > 1; Necessity goods < 1 and semi–luxury goods = 1 11. price elasticity of demand depends on: a. The closeness of substitutes. b. The proportions of income spend on the good. c. The time elapsed since a price change d. Nature of the good. 12. Only goods which are scarce have supply price. 13. Demand: A consumer is willing and able to purchase. Supply: A seller is willing and able to sell. 14. The law of supply: ceteris paribus, more of a good is supplied at a higher price and less of it at a lower price. 15. Market demand curve: summation of all individual demand curves. 16. Rationing of prices: A price ceiling which is a max. Price that can be legally charged for a good/ service. 17. For elastic demands, tax is entirely borne by suppliers 18. For elastic supply, tax entirely borne by buyers. 19. 20. Utility: extent of satisfaction obtained from the consumption of goods preferred by consumer. 21. Cardinalist approach: utility can be measured in subjective units (utils) 22. Ordinalist approach: utility can’t be measured, but can be ranked in order of preference. 23. Marginal utility: the extra satisfaction by consuming an extra unit of a good.
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This note was uploaded on 07/20/2010 for the course ICFAI CFA taught by Professor Cfa during the Fall '09 term at Indian School of Business.

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Eco Notes (CFA520) - Economics [CFA520] 1. The tendency of...

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