CFA Level 1

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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.

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.

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