Microeconomics - Introduction

Economics involves the choices people make when matching their limitless needs and wants with a scarcity of resources. The word "economics" is derived from the Greek words "oikos", which means house, and "nomos", which means manager. So the term originally referred to management of the household. Today, the term has been broadened to refer to firms and all of society.

Another way of looking at economics is to consider the field as a set of tools for analyzing people and groups and the choices that they make. Accountants are trained to render an account of financial activity for a company. Lawyers are trained into a certain mode of thinking so as to resolve issues in a legal framework. Similarly, economists are trained to use a set of tools and principles to analyze why individuals, firms, governments and other groups behave as they do.

Models
Economists often use models, which are representations of what the economist wishes to analyze. If, for example, an economist wishes to analyze the behavior of a labor union, the economist will not try to include every possible aspect and piece of data about labor unions in his or her model. Important factors will be focused on, such as wages, benefits, alternative jobs, etc. Hopefully the economist's model will include all of the important variables and will give little or no weight to less critical variables.

Most economic analyses include the phrase "everything else is remaining the same", so attention can be focused on the variables specified by the model. Of course, this assumption is rarely true in real life. If one were trying to analyze federal deficits and interest rates, for example, there would be plenty of change during the time period analyzed.

The CFA Level I Exam
The economics portion of the CFA Level I exam touches on a wide range of economic theory. The material covered would normally be taught in senior (or graduate level) microeconomic, macroeconomic, money and banking, and international trade courses. You will need to understand all of the material presented here in order to successfully answer all of the questions given. There will be a few questions that require the solution of equations, particularly with regards to foreign exchange.

This section focuses on preliminary economic concepts you should know for your upcoming exam. Note that your upcoming CFA Level 1 exam will not test directly on these basic concepts, but CFA Institute notes that you should have a basic understanding of these topics to ensure success on the more challenging topics that lie ahead.

Supply and Demand


Related Articles
  1. Professionals

    How to Ace the CFA Level I Exam

    Prepare to ace the CFA Level 1 exam by studying systematically.
  2. Professionals

    Introduction

    CFA Level 1 - Equity Investments. Introduction to equity investments. Learn how much of this section will be tested on the exam.
  3. Financial Advisors

    Tips on Passing the CFA Level I on Your First Attempt

    Obtain valuable tips and helpful study instructions that can help you pass the Level 1 Chartered Financial Analyst exam on your first attempt.
  4. Professionals

    Pass Your CFA Exams on the First Try

    Become one of the elite who pass these exams by using these simple study methods.
  5. Your Practice

    CFA Vs. Series 7: Which is Easier

    Find out which is exam is easier: The Chartered Financial Analyst (CFA) exam, or the Series 7 securities exam for registered representatives.
  6. Professionals

    What To Expect On The CFA Level I Exam

    Becoming a chartered financial analyst requires the passing of three grueling exams covering an array of topics.
  7. Career Education & Resources

    How Hard are the CFA Exams?

    Learn about the difficulty of the CFA exams with a description of the tests, some statistics on pass rates and suggestions that can help you pass the exams.
  8. Economics

    A Day In The Life Of An Economist

    There’s a lot more to being an economist than just analyzing numbers. Here's a typical day.
  9. Financial Advisors

    Putting Your CFA Level I on Your Resume

    Learn techniques for emphasizing your CFA Level I status in the Skills and Certifications or Professional Development section of your resume.
  10. Professionals

    Standard VII: CFA Responsibilities

    CFA Level 1 - Standard VII: Responsibilities As A CFA Institute Member Or CFA Candidate, Standard VII-A and Standard Vii-B
RELATED TERMS
  1. Chartered Financial Analyst - CFA

    A professional designation given by the CFA Institute (formerly ...
  2. Economist

    An expert who studies the relationship between a society's resources ...
  3. Financial Economics

    A branch of economics that analyzes the use and distribution ...
  4. Microeconomics

    The branch of economics that analyzes the market behavior of ...
  5. Financial Modeling

    The process by which a firm constructs a financial representation ...
  6. Series 86/87

    An exam administered by the Financial Industry Regulatory Authority ...
RELATED FAQS
  1. Is it required to order the CFA guides in order to prepare for the CFA?

    Many of the candidates preparing for their upcoming CFA exam are working full time and trying to balance an adequate amount ... Read Answer >>
  2. When must the required three years of qualifying work experience be completed in ...

    According to the CFA Institute, the three years of qualifying work experience in a financial field can be completed before ... Read Answer >>
  3. I am interested in pursing the CFA charter, but I do not have a degree in business ...

    The Chartered Financial Analyst (CFA) program is by no means an introduction to the world of investment. CFA Institute (formerly ... Read Answer >>
  4. How do I become a Chartered Financial Analyst (CFA)?

    Understand what it means to hold the Chartered Financial Analyst designation. Learn how a candidate can work to become a ... Read Answer >>
  5. How can I withdraw from my CFA Level 1 exam?

    According to the CFA Institute, a CFA Level 1 candidate can withdraw from his or her current CFA examination (no later than ... Read Answer >>
  6. What is the difference between accounting and economics?

    Discover the difference between accounting and economics by comparing and contrasting the financial discipline of accounting ... Read Answer >>
Hot Definitions
  1. Return On Invested Capital - ROIC

    A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. ...
  2. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  3. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  4. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
Trading Center