What CFA Level 1 Economics actually tests
Economics is 6-9% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Demand & Supply Analysis | Elasticities, consumer/producer surplus |
| Firm & Market Structures | Perfect competition, monopoly, oligopoly, monopolistic competition |
| Aggregate Output & Income | GDP, GNP, IS-LM framework, Keynesian vs. monetarist views |
| Business Cycles | Expansion, peak, contraction, trough, leading indicators |
| Monetary & Fiscal Policy | Money supply, money multiplier, Taylor rule, crowding out |
| International Trade | Comparative advantage, trade restrictions, balance of payments |
| Currency Exchange Rates | Spot/forward rates, purchasing power parity, interest rate parity, Fisher effect |
Why elasticity trips candidates up
Elasticity questions are simple in principle — a ratio of two percentage changes — but candidates lose marks on the sign and the interpretation, not the arithmetic. Demand elasticity is (almost) always negative, and whether demand is "elastic" or "inelastic" hinges on whether the magnitude is above or below 1 — a distinction that's easy to blur under exam-day time pressure.
Sample question: Price Elasticity of Demand
Economics · Medium difficulty
When the price of a good rises from $20 to $22, quantity demanded falls from 100 units to 92 units. Using the midpoint (arc) elasticity formula, what is the price elasticity of demand?
A. −0.875 (inelastic)
B. −1.25 (elastic)
C. −0.50 (inelastic)
D. −2.00 (elastic)
The correct answer is A — −0.875 (inelastic).
Midpoint elasticity = (ΔQ / average Q) / (ΔP / average P) = (−8 / 96) / (2 / 21) = −0.0833 / 0.0952 = −0.875. Since the magnitude (0.875) is less than 1, demand is inelastic over this range — a 10% price increase produced a smaller than 10% drop in quantity demanded.
Midpoint elasticity = (ΔQ / average Q) / (ΔP / average P) = (−8 / 96) / (2 / 21) = −0.0833 / 0.0952 = −0.875. Since the magnitude (0.875) is less than 1, demand is inelastic over this range — a 10% price increase produced a smaller than 10% drop in quantity demanded.