ECONOMICS CHEAT SHEET — CFA LEVEL I

MICROECONOMICS

Supply & Demand

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Price Elasticity of Demand (PED)

Formula: PED = % change in Qd / % change in P

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Cross-price elasticity: Positive = substitutes; Negative = complements

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Market Structures & Pricing Power

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Theory of the Firm — Cost & Output

Key formulas:

• MC = ΔTC / ΔQ (change in total cost per unit)

• ATC = TC / Q = AFC + AVC

• AFC = FC / Q (declines as Q rises)

• AVC = VC / Q

Profit maximization: MR = MC (all market structures)

• Perfect competition: P = MR = MC

• Monopoly: MR < P; produces less, charges more → deadweight loss

Operating leverage: High fixed costs magnify profit swings with volume

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MACROECONOMICS

GDP & Measurement

Three approaches (all equal):

Expenditure: GDP = C + I + G + NX

Income: Sum of wages, profits, interest, rent

Output: Sum of value added at each stage

Real GDP = adjusts for inflation; measures actual growth (preferred for analysis)

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Business Cycle

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Indicator types:

• Leading (turn *before* economy): Yield curve, new orders, housing starts

• Coincident (turn *with* economy): Industrial production, employment

• Lagging (turn *after* economy): Commercial loans, corporate spreads

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Inflation

Definitions & measures:

• CPI: Consumer price index; most widely cited

• PPI: Producer prices; often leads CPI

• Core inflation: Excludes volatile food & energy

Three causes:

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Quantity theory: M × V = P × Y

• M = money supply; V = velocity; P = price level; Y = real output

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Fiscal & Monetary Policy

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Concept	Definition	Investment Implication
Demand curve	Slopes downward: ↓P → ↑Q demanded	Price increases reduce sales
Supply curve	Slopes upward: ↑P → ↑Q supplied	Higher prices incentivize production
Equilibrium	Where Qs = Qd	Market clearing; no pressure to change
Shift drivers	Income, substitute prices, costs, tech, expectations	Forecast industry revenue & margins
Classification	Value	Effect on Total Revenue (↑P)	Examples
Elastic	\	PED\	> 1	↓ Revenue	Luxury goods, many substitutes
Unit elastic	\	PED\	= 1	No change	Break-even point
Inelastic	\	PED\	< 1	↑ Revenue	Necessities, no substitutes (pharma drugs)
Structure	# Firms	Product	Pricing Power	P vs. MC	LR Profit
Perfect Competition	Many	Homogeneous	None	P = MC	Zero
Monopolistic Competition	Many	Differentiated	Some	P > MC	Zero (LR)
Oligopoly	Few	Similar	Significant	P > MC	Positive; strategic interdependence
Monopoly	One	Unique	Full	P >> MC	Positive; deadweight loss
Phase	Output	Employment	What to do
Expansion	↑	↑	Overweight equities
Peak	Max	High	Shift to defensive; prepare for bonds
Contraction/Recession	↓	↓	Overweight bonds, safe havens
Trough	Min	Low	Rotate back to equities
Type	Driver	Typical Environment
Demand-pull	Excess aggregate demand	Late expansion, overheating
Cost-push	↑ Input costs (wages, energy)	Supply shock, stagflation risk
Monetary	M ↑ faster than output	Loose central bank policy
Policy	Tool	Effect	Risk
Expansionary Fiscal	↑ Spending or ↓ Taxes	↑ Aggregate demand, growth	↑ Deficits, crowding out
Contractionary Fiscal	↓ Spending or ↑ Taxes	↓ Demand, inflation control	↓ Growth, unemployment
Expansionary Monetary	↓ Rates, ↑ Money supply (QE)	↑ Borrowing, investment, asset prices	Inflation, bubbles
Contractionary Monetary	↑ Rates, ↓ Money supply	↓ Inflation, demand	↓ Growth, unemployment

Taylor Rule frame: Central bank sets rates based on inflation gap & output gap

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HIGH-YIELD DECISION RULES

• When PED inelastic: Firm can raise price without losing much volume → focus on margin expansion

• When PED elastic: Price increase reduces revenue → focus on volume & cost control

• Early cycle: Equities; late cycle: bonds; recession: treasuries & gold

• Leading indicator deterioration: Recession likely 6–12 months ahead

• Yield curve inversion: Recession signal (leading)

• P > MC only in: Monopolistic competition, oligopoly, monopoly (not perfect competition)