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2020 CFA® Program Exam Prep
Havels Learning System Study Notes
Book 2
ECONOMICS
This document should be read in conjunction with the corresponding reading in

the 2020 Level I CFA® Program curriculum. Some of the graphs, charts, tables,
examples, and figures are copyright 2019, CFA Institute. Reproduced and
republished with permission from CFA Institute. All rights reserved.
Required disclaimer: CFA Institute does not endorse, promote, or warrant the
accuracy or quality of the products or services offered by HLS. CFA Institute,
CFA®, and Chartered Financial Analyst® are trademarks owned by CFA Institute.
CONTENTS
READING 12
Topics in Demand and Supply Analysis
1. Introduction………………………………………………………………………… 1
2. Demand Analysis: The Consumer……………………………………………….. 1
3. Supply Analysis: The Firm………………………………………………………… 9
Summary……………………………………………………………………………… 21
Practice Questions……………………………………………………………………. 23
Reading 13
The Firm and Market Structures
1. Introduction………………………………………………………………………… 25
2. Analysis of Market Structures……………………………………………………. 25
3. Perfect Competition……………………………………………………………….. 26
4. Monopolistic Competition………………………………………………………… 31
5. Oligopoly…………………………………………………………………………… 34
6. Monopoly…………………………………………………………………………… 40
7. Identification of Market Structure………………………………………………… 46
Summary……………………………………………………………………………… 48
Practice Questions…………………………………………………………………… 51
Reading 14
Aggregate Output, Prices and Economic Growth
1. Introduction…………………………………………………………………........... 54
2. Aggregate Output and Income…………………………………………………… 54
3. Aggregate Demand, Aggregate Supply, and Equilibrium……………………… 61
4. Economic Growth and Sustainability……………………………………………… 79
Summary……………………………………………………………………………….. 84
Practice Questions…………………………………………………………………… 89
Reading 15
Understanding Business Cycles
1. Introduction……………………………………………………………………………………………………………… 94
2. Overview of the Business Cycle……………………………………………………………………………….. 94
3. Theories of the Business Cycle………………………………………………………………………………… 101
4. Unemployment and Inflation……………………………………………………………………………………. 105
5. Economic Indicators…………………………………………………………………………………………………. 113
Summary…………………………………………………………………………………………………………………………….. 116
Practice Questions………………………………………………………………………………………………………. 120
©2020 Havels Learning System

CONTENTS
Reading 16
Monetary and Fiscal Policy
1. Introduction… .............................................................................................................123
2. Monetary Policy… ......................................................................................................123
3. Fiscal Policy………………………………………………………………………… 136
4. The Relationship between Monetary Policy and Fiscal Policy… .........................142
Summary… ......................................................................................................................144
Practice Questions...........................................................................................................148
Reading 17
International Trade and Capital Flows
1. Introduction… .............................................................................................................154
2. International Trade .....................................................................................................154
3. Trade and Capital Flows: Restrictions and Agreements… ...................................162
4. The Balance of Payments… .......................................................................................167
5. Trade Organizations ...................................................................................................173
Summary… ......................................................................................................................175
Reading 18
Currency Exchange Rates
1. Introduction… .............................................................................................................182
2. The Foreign Exchange Market… ..............................................................................182
3. Currency Exchange Rate Calculations .....................................................................185
4. Exchange Rate Regimes………………………………………… 190
5. Exchange Rates, International Trade, and Capital Flows .....................................192
Summary… ......................................................................................................................197
©2020 Havels Learning System

R12 Topics in Demand and Supply Analysis 2020 Level I Notes
1. Introduction
Economics is a discipline that deals with factors affecting the production, distribution, and
consumption of goods and services. It is divided into two broad areas: microeconomics and
macroeconomics.
Macroeconomics deals with the production and consumption of the overall economy. It
focuses on aggregate economic quantities such as gross domestic product, gross national
income, and national output.
Microeconomics deals with demand and supply of goods and services at a micro level, such
as individual consumers and businesses. According to microeconomics, private economic
units can be divided into two groups of study:
• The theory of the consumer that focuses on the consumption of goods and services.
• The theory of the firm that focuses on the supply of goods and services.
This reading focuses on microeconomics and covers the demand and supply side of the
market.
2. Demand Analysis: The Consumer
2.1. Demand Concepts
Demand is the willingness and ability of consumers to purchase a given amount of good or
service at a given price. The law of demand states that as the price of a good rises,
consumers will want to buy less of it. Similarly, as price falls, the quantity demanded
increases. Apart from the good’s own price, other factors that impact consumer demand
include prices of other substitute and complement goods, customers’ incomes, and
individual tastes and preferences.
The general form of a demand function is shown below:
Demand function for good A: QD = f (PA , I, PB … … )
where:
QD = quantity demanded of some good.
I = consumer’s income.
PA = price per unit of a related good A.
PB = price per unit of a related good B.
Let us take a hypothetical example of a demand function for the quantity of chairs demanded
in a small town. The demand function is given by:
QD = 10 – 0.5P + 0.06I – 0.01PT
In the equation above, I is the consumers’ income and PT is the price of tables. Note the signs
of the coefficients for income and price of tables. Chairs and tables are complementary
products as they sell together. The quantity demanded for chairs, QD, and price of tables, PT,
are inversely related. If the price of a table increases, then the quantity demanded for chairs
© IFT. All rights reserved 2

1
decreases. Similarly, income has a positive coefficient. If income increases, then the quantity
demanded for chairs increases.
Now, let us assume that the consumers’ income and the price of the table are fixed at a
particular point in time. If the values of I and PT are 1633.33 and 800.00 respectively, then
the quantity demanded can be rewritten as:
QD = 100 – 0.5P
The inverse demand function expresses the simple demand function in terms of price. The
above function can be rearranged and expressed in terms of P as:
P = 200 - 2Q
A demand curve is a graphical representation of the inverse demand function. The demand
curve plots the price on the y-axis and the quantity on the x-axis. It shows the quantity of a
good that consumers are willing to buy at any given price, all else equal.
Let us plot the demand curve given by the equation P = 200 - 2Q. Here, the intercept is 200
and the slope of the curve is -2. The slope of the demand curve is measured as the change in
price divided by the change in quantity.
ΔP
Slope of the demand curve =
ΔQ
Interpretation of the graph:

• The demand curve shows the highest quantity consumers are willing to purchase at
each price. When P = 200, the highest quantity consumers are willing to purchase is 0.
• Similarly, the demand curve also shows the highest price consumers are willing to
pay for each quantity. When Q = 50, the highest price consumers are willing to pay is
100.

2
• The slope of the demand curve is negative. This implies that as price decreases, the
quantity demanded increases.
• Movement along the demand curve: When a good’s own price changes, the quantity
demanded changes, all else equal. This change is called a movement along the
demand curve. For instance, as price increases from 100 to 110, quantity decreases
along the line (demand curve) from 50 to 45.
• Shift in the demand curve: A change in the value of any other variable will cause the
demand curve to shift. This is called change in demand. For instance, shift in demand
is caused by changes in consumers’ incomes, price of substitutes, and price of
complements.
2.2. Own Price Elasticity of Demand
Own-price elasticity of demand can be expressed as the percentage change in quantity
divided by the percentage change in price.
∆Qdx
%ΔQd Qd ∆Qd P
Epdx = %ΔP =
x x
∆Px = ( ∆Px ) x (Qxd)
x x x
Px
Before we go further, let us refresh a basic mathematical principle. Consider a simple

equation:
A = 10 + 5B – 6C + 8D. Given this equation, ∆A/∆B is equal to the coefficient of B which is 5.
Similarly, ∆A/∆C is equal to the coefficient of C which is -6.
Going back to our demand function, QD = 100 – 0.5P. Based on the mathematical principle
we just discussed, ∆Q/∆P = -0.5. Assume the price is $60; the quantity demanded at this
price will be 70. The own-price elasticity of demand is: -0.5 x 60/70 = -0.4. This implies that
when the price is $60, a 1% increase in price results in a 0.4% decrease in the quantity
demanded for chairs.
Instructor’s Note
Own-price elasticity of demand is usually negative.
Elastic, Inelastic, and Unit Elastic
For all linear demand curves, elasticity varies depending on where it is calculated. Let us go
back to the own-price elasticity of demand for chairs to see which parts of the demand curve
are inelastic, elastic and unit elastic.
P
Elasticity = −0.5 x Q
• Inelastic: When elasticity is less than one, demand is inelastic. At low prices, quantity
demanded is high. This causes the P/Q ratio to be small which results in low
elasticity.
• Unit elastic: An elasticity of 1 is said to be unit elastic.
• Elastic: When elasticity is greater than one, demand is elastic. At high prices, quantity
demanded is low. This causes the P/Q ratio to be high which results in high elasticity.

3
These scenarios are shown in the figure below:
Inference:
• The top part of the demand curve is elastic.
• Somewhere in the middle, it is unit elastic.
• The bottom part of the demand curve is inelastic.
• If the demand curve is steeper, it will be relatively more inelastic.
• If the demand curve is flatter, it will be relatively more elastic.
Extremes of Price Elasticity
There are two special cases of linear demand curves in which the elasticity is the same at all
points - perfectly elastic and perfectly inelastic - though it is difficult to find real life
examples. Demand is perfectly inelastic (represented by a vertical demand curve) when the
quantity demanded is the same over a price range. Demand is perfectly elastic for a given
price (represented by a horizontal demand curve) when a change in price will cause the
quantity demanded to reduce to zero.
Elasticity
Perfectly Elastic Perfectly Inelastic
Horizontal demand curve Vertical demand curve.
Elasticity = ∞ Elasticity = 0
A small change in price can lead to A change in price has no change in quantity
infinitely large change in quantity. All demanded.
producers must sell at the market price, or Example: generic food such as bread.
else consumers will shift to substitutes.
Example: Gourmet food items.

4
Factors that affect Demand Elasticity

The factors that help in determining whether the demand for a product is highly elastic are
as follows:
• Substitutes: If there are close substitutes for a good and the price of the good
increases, then the quantity demanded for the good will decrease substantially
implying the demand is highly elastic. If there are no close substitutes, the demand is
less elastic.
• Portion of budget spent on a good: If people spend a large part of their income on a
good, then the demand is likely to be elastic, e.g. cars. On the other hand, if people
spend only a small portion of their income on a good, then the demand is likely to be
inelastic, e.g. chocolates.
• Time horizon: Long-run demand is more elastic than the short-run demand for most
products as people take time to adjust their consumption (quantity demanded) to the
new prices. In the long run, consumers will find alternatives. For instance, if prices of
cars increase, consumers will find alternative modes of transport in the long run.
• Discretionary vs. nondiscretionary: The demand for necessary goods is less elastic,
e.g. bread. While the demand for discretionary goods is more elastic, e.g. vacations.
Elasticity and Total Expenditure
Total expenditure is the total amount consumers spend on a product. It is the price
multiplied by the quantity.
Total expenditure = P x Q = Price per unit x quantity or number of units sold
Elastic demand: When demand is elastic, a 1% decrease in price causes a quantity demanded
to increase by more than 1%. As a result, total expenditure increases.
Inelastic demand: When demand is inelastic, a 1% decrease in price causes quantity
demanded to increase by less than 1%. As a result, total expenditure decreases.
Unit elastic: Total expenditure does not change at the point where demand is unit elastic.

5
The relationship between change in price and total expenditure is summarized in the table
below:
Elasticity and Expenditure
%ΔQ
Own-price elasticity of demand = %ΔP
Total expenditure = P x Q = Price per unit x quantity or number of units sold
Ed > 1: elastic demand Price and total expenditure move in opposite directions
Ed = 1: unitary elastic Change in price has no effect on total expenditure
Ed < 1: inelastic demand Price and total expenditure move in the same direction
2.3. Income Elasticity of Demand
Income elasticity of demand is the percentage change in the quantity demanded divided by a
percentage change in income, all else constant. It measures how sensitive the quantity
demanded is to changes in income. It is expressed as:
%ΔQ ∆Q I
Income elasticity of demand = = x
%ΔI ∆I Q
If income elasticity of demand is 0.6, then it means that for every 1% increase in income, the
quantity demanded will increase by 0.6%. While own-price elasticity is usually negative,
income elasticity of demand can be positive, negative, or zero.
Positive income elasticity means that as income increases, quantity demanded also
increases. Negative income elasticity means that as income increases, quantity demanded for
these goods decreases.
Based on income elasticity, goods can be categorized as normal or inferior:
• Normal good: Income elasticity is positive. That is, as income rises, quantity
demanded (consumption of the good) also rises.
• Inferior good: Income elasticity is negative. That is, as income rises, people buy less
of these goods. For example, bicycles in South Asia and fast food in US.
As discussed earlier a change in any variable other than own price would cause the demand
curve to shift. Therefore, a change in income will cause a shift in the demand curve.
2.4. Cross-Price Elasticity of Demand
Cross-price elasticity of demand measures how sensitive the quantity demanded of a good, X,
is to changes in the price of another related good, Y, all else constant. The equation for the
cross-price elasticity of demand is similar to the own-price elasticity of demand except that
the denominator uses the price of another good, Y. It is expressed as:
%ΔQ ∆Qx Py
Cross-price elasticity of demand Ed = %ΔP x = x
y ∆Py Qx

6
Substitutes: Two goods are substitutes if one can be used instead of the other. The cross-
price elasticity of demand is positive for substitute goods. An increase in the price of a
substitute good would increase the quantity demanded of the subject good.
Complements: Two goods are complements if they are used together. The cross-price
elasticity of demand is negative for complement goods. An increase in the price of a
complement good would decrease the quantity demanded of the subject good. Example:
cereal and milk, and petrol and cars.
Example
A consumer’s weekly demand for coffee is given by the following demand function:
QA = 2 − 0.4PA + 0.0005I + 0.10PB − 0.15PC
Assume the price of coffee is PA = 10, the price of tea is PB = 55, the price of lemon water is PC
= 10, and income is I = 2,000. Given this data, calculate the following:
1. Own-price elasticity of demand for A.
2. Income elasticity of demand for A.
3. Cross-price elasticity of demand of A against price of B.
4. Are A and B substitutes or complements?
5. Cross-price elasticity of demand of A against price of C.
6. Are A and C substitutes or complements?
Solution:
1. First, calculate the value of Q by plugging in the values for PA = 10, PB = 55, PC = 10, I =
2,000 in the demand function.
QA = 2 − 0.4PA + 0.0005I + 0.10PB − 0.15PC
= 2 – 0.4 x 10 + 0.0005 x 2000 + 0.1 x 55 – 0.15 x 10
= 2 – 4 + 1 + 5.5 − 1.5 = 3
∆Q P
Own-price elasticity of demand for A = x
∆P Q
∆Q
is the own-price elasticity coefficient, which is -0.4 from the equation.
∆P
10
So, own-price elasticity of demand = −0.4 x = - 1.333
3
∆Q I 2000
2. Income elasticity of demand for A = x = 0.0005 x = 0.33
∆I Q 3
55
3. Cross-price elasticity of demand of A against price of B = 0.1 x = 1.8333
3
4. A and B are substitutes because as the price of B goes up, the quantity demanded of A
goes up. A positive relationship indicates the products are substitutes.
10
5. Cross-price elasticity of demand of A against price of C = −0.15 x = -0.5
3
6. A negative relationship between the price of C and the quantity demanded of A means
the two products are complements.

7
2.5. Substitution and Income Effects

The law of demand states that when a good’s own-price falls, its quantity demanded
increases, all else equal. Let us take an example of a hypothetical two-goods economy
consisting of bread and milk to understand the two reasons why quantity demanded rises
when price falls. Assume the price of bread decreases. Bread is now cheaper relative to milk,
so consumers buy more bread. This is called the substitution effect. A lower price of bread
means the consumer has greater buying power, which implies that the real income has
increased. The change in income will impact how much bread consumers buy. This is called
the income effect.
2.6. Normal and Inferior Goods
The table below summarizes the substitution and income effects of a price decrease for
normal and inferior goods:
Substitution Effect Income Effect
Normal good Buy more because when the good’s Buy more because there is an
price decreases, it is relatively increase in real income that
cheaper than its substitutes. increases the consumption.
Inferior Buy more because when the good’s Buy less because the increase in
good price decreases, it is relatively real income causes the consumer
cheaper than its substitutes. to buy less of the inferior good.
Giffen goods:
A Giffen good is an extreme case of an inferior good where the income effect dominates the
substitution effect. In this case, a decrease in price causes a decrease in quantity demanded
which implies a positively sloped demand curve. Hence Giffen goods are an exception to the
law of demand. The curriculum identifies rice in rural China as a possible Giffen good. When
the price of rice decreased, consumers in rural China with very low incomes decreased their
intake of rice and switched to alternatives such as meat that provided more calories.
Veblen goods
Like Giffen goods, Veblen goods also have an upward sloping demand curve and hence they
also violate the law of demand. However, the similarity ends there. The characteristics of
Veblen goods are described below:
• Veblen goods are status goods; an increase in price increases the value to some
consumers and therefore their quantity demanded increases.
• Veblen goods are based on the concept of conspicuous consumption. This means that
consumers derive utility from the fact that others regard them as someone who
consumes an expensive good. As the price of such products increase, consumers will
be inclined to purchase more to flaunt their affluence. For example, a Bugatti Veyron
car, a yacht, or a private island.

8
3. Supply Analysis: The Firm

3.1. Marginal Returns and Productivity
Factors of production are the inputs used by a firm to produce goods and services. These
inputs include land, labor, capital, and raw materials. For simplicity, we will consider only
two inputs:
• Labor (L): skilled, unskilled, management personnel, etc.
• Capital (K): physical capital such as machinery, equipment, and tools used by labor to
produce output.
Before moving on, let us understand a few basic terms.
• Marginal product of labor: Increase in the quantity of output from an additional unit
of labor.
• Marginal product of capital: Increase in the quantity of output from an additional unit
of capital.
• Productivity: Average output per unit of input (such as labor or capital).
• Increasing marginal returns: Increase in productivity as the quantity of an input
increases.
• Law of diminishing marginal returns: As more and more units of an input resource
are added, productivity will eventually decrease.
Cost of production. The total cost of production is given by the equation below:
Total cost TC = wL + rK
where:
w is the wage rate per hour
L is the number of labor hours
r is the cost per hour of capital and
K is number of hours for which capital is used.
Two factors that lower the cost of producing at a given level of output are:
• Increase in input productivity.
• Decrease in input prices.
Total Product, Average Product, and Marginal Product
Total product is the total output from all inputs during a time-period. It is denoted by TP or
Q. Total product gives information about the total production of a firm during a time-period,
but reveals very little about how efficient the firm is.
Average product is the total product divided by the quantity of a given input. It measures
TP 𝑄
the productivity of an input. The average product of labor is given by: or 𝐿 .
L

9
Marginal product is the amount of additional output resulting from using one more unit of
input, assuming other inputs are fixed. It is calculated by dividing the change in total product
ΔTP ΔQ
by the change in the quantity of input. Hence, the marginal product of labor is: or ΔL .
ΔL
Let us take an example of three companies X, Y and Z whose total product and average
product of labor are given below:
Company Output (TP) Labor hours AP = TP/L
Company X 250,000 250 1,000
Company Y 450,000 500 900
Company Z 500,000 625 800
It is not possible to identify the most efficient company by looking at just the TP values. AP is
a better measure of efficiency. Company X has the highest AP and is therefore the most
efficient.
The table below shows TP, AP and MP of labor for a firm across different levels of labor:
Units of Labor (L) TP AP MP
1 100 100 100
2 210 105 110
3 300 100 90
4 360 90 60
5 400 80 40
6 420 70 20
7 350 50 -70
Interpretation:
• The total product (output) increases until the sixth unit of labor and declines when
the seventh unit of labor is added. Hence the total product is maximum (420) with six
units of labor.
• When we go from one unit of labor to two units of labor the marginal product (MP)
increases. This implies increasing marginal returns. The marginal product for the
210 − 100
second unit of labor is calculated as: = 110.
2−1
• When a third unit of labor is added the MP decreases. This implies diminishing
marginal returns.
3.2. Breakeven and Shutdown Analysis
Economic profit vs. accounting profit
Economic profit is the difference between the total revenue and total economic costs. It is
also known as abnormal profit. Another definition of profit is accounting profit. Accounting
profit is the difference between the total revenue and total accounting costs.
Economic profit = Total revenue - Total economic costs

10
Economic profit = Accounting profit – Total implicit opportunity costs

Accounting profit = Total revenue – Total accounting costs
Economic cost considers opportunity costs, while accounting cost does not. Economic cost is
the sum of accounting cost and opportunity cost. Let us take an example. Assume Megan
starts a business with an equity capital of $100 million. The required return on the invested
amount is 10%. Hence, the opportunity cost is 10% of $100 million = $10 million. If the
accounting cost is $190 million, then the total economic cost is $200 million. Continuing with
this example, if the revenue is $200 million, the economic profit is zero and the accounting
profit is $10 million. In this case, it can be said that the business is earning a normal profit
of $10 million.
Instructor’s Note:
In this reading, ‘cost’ refers to economic cost and ‘profit’ refers to ‘economic profit’.
If a firm’s revenue is equal to the firm’s total economic cost, the economic profit is zero and
the firm is said to be earning a normal profit.
Accounting profit = economic profit + normal profit.
Normal profit = implicit costs or opportunity costs.
Marginal Revenue
Marginal revenue is defined as the change in total revenue divided by the change in quantity.
It is the incremental revenue because of producing an additional unit per time-period. It is
expressed as:
∆TR
MR = ∆TQ
We will now analyze marginal revenue under two market conditions: perfect competition
and imperfect competition.
Marginal revenue under perfect competition
In a perfectly competitive market:
• There are many buyers and sellers and the interaction between them determines the
equilibrium price.
• All the firms are relatively small and the products sold by the firms are identical, or
homogeneous.
• All the firms are price takers. They have no pricing power – that is, the individual
consumers and sellers cannot influence the market price of a good/service in any
way.
• Any quantity of the product can be sold at the market price. But, a small increase in
price would mean losing all sales. Example: wheat.
• The demand curve is horizontal or perfectly elastic.

11
• In a perfectly competitive market, MR = AR = P. Price is constant. This implies that

total revenue increases by P if the quantity increases by one unit.
Marginal revenue under imperfect competition
In an imperfect competitive market:
• The firms sell differentiated products and have a large market share.
• There may not be any close substitutes.
• Marginal revenue intersects the x-axis at the point where total revenue is maximized.
• The marginal revenue and demand curve are downward sloping.
Marginal Cost
Marginal cost is the incremental cost of producing one more unit. It can be calculated by
dividing the change in total cost by the change in quantity. It is expressed as:
∆TC
Marginal cost MC = ∆TQ
Economists distinguish between short-run and long-run marginal cost. Short-run marginal
cost is the cost of producing an additional unit assuming only labor costs vary and all other
factors of production are constant. Short-run marginal cost is directly related to wage price
𝐰
and inversely related to productivity. Short-run marginal cost, 𝐒𝐌𝐂 = 𝐌𝐏 . Long-run
𝐋

12
marginal cost is the cost of producing one more unit assuming all factors of production are
variable.
Fixed and Variable Costs
Total cost can be broken down into fixed and variable costs. Fixed costs do not change with
the quantity of output. Variable costs change with the quantity of output. Average variable
cost is the ratio of total variable cost to quantity. It is expressed as:
TVC
Average variable cost =
Q
Profit Maximization
A firm’s profit is maximized at a level of output where marginal revenue is equal to marginal
cost (MR = MC). If marginal revenue exceeds marginal cost, a firm can increase profits by
producing more. If marginal revenue is less than marginal cost, the firm should scale back.
This discussion assumes that marginal cost is rising with increased output.
Understanding the Interaction between Total, Variable, Fixed, and Marginal Cost and
Output
All the graphs we look at in this section are from a short-run perspective. In the short run,
one or more factors of production are fixed. Usually capital is fixed in the short run while
labor may change. The graph below shows the cost curves for a firm in the short run.

• Total fixed cost is constant or flat for any given output level. It does not change as
production varies.
• Total variable cost increases as the quantity of output increases. For simplicity, it is
assumed to have a linear relationship with quantity. If there is no production, then
TVC is zero.

13
• The total cost for any quantity of output is the sum of total fixed cost and total
variable cost. It also increases as production increases and the quantity of output
increases.
The graph below shows the MC, ATC and AVC curves for a firm in the short run.

AVC Curve
• The AVC curve is U-shaped but this can vary from company to company, or industry
to industry.
• As output increases, average variable cost falls to a minimum and then increases. It
falls, because the total fixed cost is distributed over a large number of units.
ATC Curve
• Like the AVC curve, the ATC curve is also U-shaped but higher than the AVC curve
because:
o AFC is added to AVC for any given quantity of output.
o AVC increases more quickly than AFC decreases.
• The distance between the ATC and AVC for any output quantity will be AFC.
Marginal cost curve
• MC intersects AVC at its lowest point, S. The corresponding quantity is QAVC . MC is
greater than AVC beyond QAVC .
• If the marginal cost of producing one more unit is less than the average variable cost
(to the left of the minimum point), then it will pull the AVC down.
• Similarly, if the marginal cost of producing one more unit is greater than the average
variable cost (to the right of the minimum AVC point), then it will pull the AVC up.
• The lowest point for the ATC is T, where MC equals ATC. Beyond T, MC is greater than
ATC.

14
AFC
• The difference between ATC and AVC for any quantity will be AFC. AFC is also the
total fixed cost divided by the quantity.
• Average fixed cost falls as output increases because the numerator in the above
formula is constant while the denominator increases. Put differently, the total fixed
cost is spread over a larger output, so it slopes downward as output quantity
increases.
Revenue under Conditions of Perfect and Imperfect Competition
Total revenue under perfect competition:
• Total revenue is the price multiplied by quantity (TR = P x Q).
• The firm has no pricing power, and price is decided by the market.
• The demand curve is horizontal and slope is zero.
• Market price is equal to marginal revenue, which is equal to average revenue. P = MR
= AR.
• TR increases by the price for every incremental increase in output. The TR curve is
linear and positively sloped.
Total revenue under imperfect competition
• The firm has a large market share.
• The demand curve is downward sloping. The firm must decrease the price in order to
sell more.
• Total revenue increases with greater quantity. However, there is a quantity at which
the profit is maximized. Beyond this, any price decrease will result in a decrease in
total revenue as the effect of the decrease in price will be greater than the quantity
sold.
• The TR curve for such a firm is initially zero, then it increases and subsequently
decreases. It increases when MR is positive and demand is elastic. It falls when MR is
negative and demand is inelastic. TR is maximum when MR is zero.
Profit Maximization, Breakeven, and Shutdown Points of Production
Profit is maximized when:
• Marginal revenue equals marginal cost. MR = MC.
• MC is rising.
• Alternatively, when the difference between total revenue and total cost is the
greatest.
The graph below shows the TR, TC, demand curve, and profit maximization under perfect
competition.

15
𝐐𝐦𝐚𝐱 is the profit-maximizing quantity where MR = MC and MC is rising.

Break even Analysis
A firm is said to break even under the following conditions:
• total revenue equals total costs (TR = TC).
• price (average revenue) equals average total costs (AR = ATC).
When a firm is operating at its break-even point, the economic profit is zero. It might still be
earning a positive accounting profit.
A perfectly competitive market with no barriers to entry will attract new entrants. The
increased competition will lead to increased output and lower prices in the long run where
no firm is able to earn an excess return or positive economic profit.
Instructor’s Note
If economic profit is zero, accounting profit is called normal profit.
Under perfect competition, firms earn only normal profits in the long run.
The Shutdown Decision
The relationships that show when a firm must operate or shutdown are given in the table
below:
Short-run effect of the relationship between price and ATC on a firm
Situation Short run Long run
TR ≥ TC Operate Operate
TR ≥ TVC but TR < TC Operate Exit
TR < TVC Shutdown Exit

16
Let us understand a firm’s breakeven and shutdown point using the graph below.

• Assume the price at P3 is 150. If the competition is perfect, then P3 is the demand
curve and MR = AR.
• At any point on the MC between P2 and P3, the firm is profitable because the average
revenue is greater than the average total cost.
• The breakeven point is the point where P = ATC = MC. Graphically, it is the point
where MC intersects ATC. The corresponding quantity is the breakeven quantity, QBE .
Suppose this price is 100.
• Between A and B, the price is greater than AVC. The firm will continue to operate in
the short run even though it is not profitable.
• To the left of A, the price is less than AVC. The firm will shut down.
3.3. Understanding Economies and Diseconomies of Scale
Economists use two time horizons based on how firms are able to vary the quantity of input:
short run and long run. In the short run, at least one of the inputs or factors of production is
constant. In the long run, all factors of production are variable.
Short- and Long-Run Cost Curves
The graph below shows a set of short-run total cost curves for each level of capital input.

17
In the short run:

• Typically, where we are considering two factors of production, capital is fixed in the
short run and the variable factor is labor. However, when capital changes, we get a
new STC curve for each level of capital input.
• The fixed-input constraint along with other input prices determines a firm’s short-run
total cost curve (STC).
In the long run:
• All factors of production (both labor and capital) are variable.
• Think of the long-run total cost curve (LTC) as a combination of several STCs. By
drawing a tangent to the minimum point of all the SRATC curves and connecting
them, we get the LTC curve for the firm.
• The LTC is called the envelope curve. It envelops or encompasses all combinations of
technology, plant size, and physical capital.
Defining Economies of Scale and Diseconomies of Scale
Each STC curve has a corresponding short-run average total cost curve (SRATC). The STCs
for different plant sizes and the corresponding long-run average total cost curve (LRATC) is
shown in the exhibit below.

18

• The SRATC defines what the per-unit cost will be for any quantity in the short run.
• The SRATC shifts down and to the right. Note that as plant size increases, the per-unit
cost decreases as can be seen in the case of SRATC3.
• The LRATC is derived from connecting the lowest level of STC for each level of output.
• The shape of the long-run cost curve depends on whether the firm is facing
economies of scale or diseconomies of scale.
• Economies of scale is the decrease in the long-run cost per unit as output increases.
LRATC has a negative slope when there are economies of scale. The portion to the left
of Q3 represents economies of scale.
• Q3 represents the minimum efficient scale. It is the output level at which the long-
run average total cost is the lowest and the output is optimal. This portion exhibits
constant returns to scale where long-run average total costs do not change as output
quantity increases.
• Beyond Q3, the LRATC goes up. This portion represents diseconomies of scale. Here
there is an increase in long-run cost per unit as output increases. LRATC has a
positive slope when there are diseconomies of scale. The right side of LRATC curve
represents diseconomies of scale.
The factors contributing to economies of scale and a lower ATC are as follows:
• Increasing returns to scale: increase in output is relatively larger than the increase in
input. The left side of Q3 shows increasing returns to scale.
• Division of labor/management.
• Technologically/economically efficient equipment that results in increased
productivity.
• Effective decision-making.
• Reduce waste and lowering costs through better quality control.
• Bulk purchases resulting in lower prices.

19
The factors contributing to diseconomies of scale are as follows:

• Decreasing returns to scale: Increase in output is relatively less than the increase in
input. The right side of Q3 shows decreasing returns to scale.
• Higher resource costs due to supply bottlenecks.
• Improper management because of size.
• Duplication of product lines.
• Higher labor costs.

20
Summary
LO.a: Calculate and interpret price, income, and cross-price elasticities of demand, and
describe factors that affect each measure.
Elasticity of demand is measured as a ratio of percentage change in quantity demanded to a
percentage change in other variables.
Own-price elasticity
% change in quanitity demanded
• Own price elasticity = % change in own price
• Own-price elasticity of demand is usually negative.
• If |own-price elasticity| > 1, then demand is elastic.
• If |own-price elasticity| < 1, then demand is inelastic.
Income elasticity
• Income elasticity = % change in income
• If income elasticity > 0, then the good is a normal good.
• If income elasticity < 0, then the good is an inferior good.
Cross price elasticity
• Cross price elasticity = % change in price of related good
• If cross price elasticity > 0, then the related good is a substitute.
• If cross price elasticity < 0, then the related good is a complement.
LO.b: Compare substitution and income effects.
Substitution effect
• When a good’s price falls, due to the substitution effect, consumers buy more of this
good as compared to other goods for which the prices have remained the same.
• Substitution effect is always positive.
Income effect
• When a good’s price falls, real income rises.
• If the good is a normal good, the income effect will be positive and more of this good
will be purchased.
• If the good is an inferior good, the income effect will be negative and less of this good
will be purchased.
LO.c: Distinguish between normal goods and inferior goods.
If income elasticity > 0, then the good is a normal good. If income increases, more of this
good is demanded.
If income elasticity < 0, then the good is an inferior good. If income increases, less of this
good is demanded.

21
Giffen goods
• Giffen goods are highly inferior, for which the negative income effect outweighs the
positive substitution effect.
• Therefore, even though price falls, the quantity demanded still decreases.
• Giffen goods have positively sloped demand curves (which means that as price
decreases the quantity demanded also decreases.)
Veblen goods
• Veblen goods are “high status” goods.
• If price increases, this makes the goods even more desirable and quantity demanded
increases.
• Veblen goods also have a positively sloped demand curve.
LO.d: Describe the phenomenon of diminishing marginal returns
• Marginal returns refer to the additional output than can be obtained by adding one
more unit of a productive input while keeping the quantities of other inputs constant.
• As the first few units of an input are added, marginal returns may increase. However,
as we keep increasing the input quantity, we reach a point where marginal returns
start to decrease.
• Inputs beyond this point produce diminishing marginal returns.
LO.e: Determine and interpret breakeven and shutdown points of production.
Situation Short Run Long Run
Price > ATC Economic Profit - Operate Economic Profit - Operate
Price = ATC Breakeven - Operate Breakeven - Operate
AVC < Price < ATC Operate Shutdown
Price < AVC Shutdown Shutdown
LO.f: Describe how economies of scale and diseconomies of scale affect costs.
Economies of scale: As output increases the long-run cost per unit decreases.
Diseconomies of scale: As output increases the long-run cost per unit increases.

22
Practice Questions
1. If the cross price elasticity between two goods is positive, the two goods are classified as:
A. normal.
B. substitutes.
C. complements.
2. A demand function for chairs is as follows: Qchairs = 200 − 2Pchairs + 0.05Income −

0.8Ptables + 1.2Pstools .
At current average prices, a chair costs $50, a table costs $100, and a stool costs $30.
Average income is $5,000. The income elasticity of demand for chairs is closest to:
A. 0.05
B. 0.64
C. 0.82
3. When the price of a good decreases its quantity purchased also decreases, it is most likely
that:
A. both the substitution effect and income effect lead to a decrease in the quantity
purchased.
B. the substitution effect leads to a decrease in the quantity purchased, while the income
effect leads to an increase in the quantity purchased.
C. the income effect leads to a decrease in the quantity purchased, the substitution effect
leads to an increase in the quantity purchased.
4. Which of the following statements best describes the difference between a Giffen good
and a Veblen good?
A. The demand curves for Giffen goods slope upward, while the demand curves for
Veblen goods slope downward.
B. Giffen goods are inferior goods, while Veblen goods are not inferior goods.
C. The substitution effect is positive for a Veblen good but negative for a Giffen good.
5. When average revenue is greater than average variable costs but less than average total
costs, a firm will most likely:
A. operate in the short run but shut down in the long run.
B. shut down in the short run but operate in the long run.
C. shut down in both the short run and the long run.
6. If a firm’s output is increased by 10%, its long-run average total cost also increases by
10%. The firm is most likely experiencing:
A. economies of scale.
B. diseconomies of scale.
C. constant return to scale.

23
Solutions
1. B is correct. With positive cross price elasticity, as the price of one good goes up, the
demand for the other good increases. Hence, we can say that the two goods are
substitutes.
2. C is correct.
Substitute current values for the independent variables (except income)
Qchairs = 200 − 2(50) + 0.05Income − 0.8(100) + 1.2(30)
Qchairs = 56 + 0.05Income
The slope of income is 0.05
For an income of $5,000 Qchairs = 306
I0 ΔQ 5,000
Income elasticity = × = × 0.05 = 0.82
Q0 ΔI 306
3. C is correct. When price decreases, the substitution effect will always lead to an increase
in the quantity purchased. The quantity purchased of a good will decrease when price
decreases only if the income effect is both negative and greater than the substitution
effect.
4. B is correct. Veblen goods are not inferior goods, whereas Giffen goods are. If income
increases, consumers of a Veblen good will increase their consumption. However, the
opposite is true for a Giffen good. Both Giffen goods and Veblen goods have demand
curves that slope upward over at least some range of prices. The substitution effect is
positive for all goods.
5. A is correct. When total revenue is enough to cover variable costs but not total fixed costs
in full, the firm can survive in the short run but would be unable to survive in the long
run.
6. B is correct. If the long-run average total cost increases as output increases, then we have
diseconomies of scale.

24
R13 The Firm and Market Structures 2020 Level I Notes
1. Introduction
This reading covers:
• Analysis of market structures: degree of competition, how the management
determines pricing and output strategy.
• Characteristics, demand, supply, optimal price, and output for different types of
market structures: perfect competition, monopolistic competition, oligopoly, and
pure monopoly.
• Techniques used by analysts to identify what market structure a firm is operating in.
2. Analysis of Market Structures
The market is defined as a group of buyers and sellers that are aware of each other, and are
able to agree on a price for the exchange of goods and services.
2.1. Economists’ Four Types of Structures
The market structure is classified into the following four categories:
• Perfect competition
• Monopolistic competition
• Oligopoly
• Monopoly
Perfect competition and monopoly are two extremes of the market structure in terms of
number of firms and profits with the other types falling somewhere in between.
2.2. Factors that Determine Market Structure
The five factors that determine market structure are:
• The number and relative size of firms supplying the product. The higher the number
of firms, the higher the degree of competition.
• The degree of product differentiation.
• Pricing power of the sellers. Are they price takers, or can they influence market
prices?
• The relative strength of the barriers to market entry and exit.
• The degree of non-price competition.
The table below summarizes the basic characteristics of the four market structures:

25
R13 The Firm and Market Structures 2020 Level I Notes
Perfect Monopolistic Oligopoly Monopoly

Competition Competition
Number of Many firms Many firms Few firms Single firm
Sellers
Barriers to Very low Low High Very high
Entry and Exit
Product Homogeneous Substitutes but Close Unique product
Differentiation differentiated substitutes or
differentiated
Non-price None Advertising and Advertising and Advertising
Competition product product
differentiation differentiation
Pricing Power None. Price Some Some to Considerable
taker. significant
Example Oranges; Milk; Toothpaste Prices of Electricity
Wheat commercial provider/any
airlines for a utility company
given route (water, cooking
gas) as they are
typically
controlled by a
government
authority
Note: This table is important from an exam perspective.
The most preferred market structure by producers is monopoly/oligopoly because they
offer the highest pricing power. The most preferred market structure by consumers is
perfect competition as prices are lower.
3. Perfect Competition
The characteristics of perfect competition are as follows:
• There are a large number of potential buyers and sellers.
• The products offered by the sellers are homogenous i.e. they are identical.
• There are few or easily surmountable barriers to entry and exit.
• Sellers have no market-pricing power. Each firm is so small relative to the market
that it does not have any influence on market prices.
• Non-price competition is absent.

26
Another random document with
no related content on Scribd:
[A BRIEFE MEMORIALL OF SONDRY
VNFORTUNATE ENGLISHMEN.
WILLIAM BALDWINE
TO THE READER.
When the printer had purposed with himselfe to print Lidgate’s
translation of Bochas, of the fall[38] of princes, and had made priuy
thereto[39] many both honorable and worshipfull: hee was
counsayled by diuers of them to procure to haue the story continued
from whereas Bochas left, vnto this present time, chiefly of such as
fortune hath dalyed with here[40] in this island: which might be as a
mirour for men of all estates and degrees as well nobles as others,
to beholde[41] the slipery deceiptes of the wauering lady, and the due
rewarde of all kinde of vices. Which aduice liked him so well, that
hee requyred mee to take paynes therein: but because it was a
matter passing my witte and skill, and more thanklesse then gainefull
to meddle in, I refused vtterly to vndertake it, except I might haue the
helpe[42] of such as in witte were apt, in learning allowed, and in
iudgement and estimation able to wielde and furnish so weighty an
enterprise, thinking[43] so to shift my handes. But hee earnest and
diligent in his affayres, procured Athlas to set vnder his shoulder: for
shortly after,[44] diuers learned men (whose many giftes neede fewe
prayses) consented to take vpon them parte of the trauayle. And
when certayne of them to the numbre of seauen,[45] were through a
generall assent at one[46] apoynted time and place, gathered
together to deuise thereupon I resorted vnto them, bearing with mee
the booke of Bochas, translated by Dan Lidgate, for the better
obseruation of his order: which although wee liked well[47] yet would
it not conueniently[48] serue, seeing that both Bochas and Lidgate
were deade, neyther were there any aliue that medled with like
argument, to whome the vnfortunate might make theyr mone. To
make therefore a state meete for the matter, they all agreede that I
shoulde vsurpe Bochas’ rome, and the wretched princes complayne
vnto mee: and tooke vpon themselues, euery man for his part to be
sundry personages, and in theyr behalfes to bewaile vnto mee theyr
greeuous chaunces, heauy destenies, and woefull misfortunes. This
done, wee opened such bookes of chronicles as wee had there
present, and Maister Ferrers (after he had founde where Bochas left,
which was aboute the ende of king Edwarde the thirde’s raigne) to
begin the matter, sayde thus:
“I maruaile what[49] Bochas meaneth to forget among his
miserable princes, such as were of our owne[50] nation, whose
number is as great as theyr aduentures wonderfull: for to let passe
all, both Britaynes, Danes, and Saxons, and to come to the last
conqueste, what a sorte are they, and some euen in his owne time,
[51] [or not much before?[52]] As for example [William Rufus the
second king of England after the conquest, slayne in the newe forest
(as hee was hunting there) by[53] Walter Tirell, with the shotte of an
arrowe. Robert duke of Normandy, eldest sonne to William
Conqueror, depriued of his inheritance of England, by the sayde
William Rufus his second brother, and after by Henry[54] his yongest
brother hauing both his eies put out, miserably[55] imprisoned in
Cardiff castle, whereas hee dyed. Likewise[56] the most lamentable
case of William, Richarde, and Mary, children of the sayde Henry,
drowned vpon the sea.[57] And [58]] king Richarde the first slayne with
a quarrell in his chiefe prosperity. Also king Iohn his brother (as
some say) poysoned.[59] Are not theyr historyes rufull, and of rare
ensample? But as it shoulde appeare, Bochas being an Italian,
minded most the Romayne and Italike story, or els perhaps hee
wanted the knowledge of ours.[60] It were therefore a goodly and
notable[61] matter, to searche and discourse our whole story from the
first beginning of the inhabiting of the isle. But seeing the printer’s
mind is to haue vs followe[62] where Lidgate left, wee will leaue that
greate laboure to other that maye entende it, and (as one being bold
first to breake the yse)[63] I will begin at the time[64] of Richarde the
second, a time as vnfortunate as the ruler therein.[65] And forasmuch
(friend Baldwine) as it shalbe your charge to note and pen orderly
the whole processe: I will so far as my memory and iudgement
serueth, somewhat further you in the trueth of the story. And
therefore omitting the ruffle made by Iacke Strawe and his meiney,
[66] with[67] the murder of many notable men which therby happened,
(for Iacke as yee knowe was but a poore prince) I will begin with a
notable example, which within a while after ensued. And although
the person at whome I begin, was no king nor prince; yet[68] sithens
hee had a princely office, I will take vpon mee the miserable person
of sir Robert Tresilian chiefe iustice of England, and of other which
suffered with him: therby to warne all of his autority and profession,
to take heede of wrong iudgementes,[69] misconstruing of lawes, or
wresting the same to serue the prince’s turnes, which rightfully
brought them to a miserable ende, which they may iustly lament in
maner ensuing.”][70]
TO THE READER.
[Before the edition 1610.]
Hauing hitherto continued the storie (gentle reader) from the first
entrance of Brute into this iland, with the falles of such princes, as
were neuer before this time in one volume comprised, I now proceed
with the rest, which take their beginning from the Conquest, whose
pen-men being many and diuers, all diuerslie affected in the method
of this their Mirror, I purpose only to follow the intended scope of that
most honorable personage, who, by how much he did surpasse the
rest in the eminence of his noble condition, by so much he hath
exceeded them all in the excellencie of his heroicall stile, which with
a golden pen he hath limmed out to posteritie in that worthy obiect of
his minde, the tragedie of the duke of Buckingham, and in his
preface then intituled master Sackuil’s induction. This worthie
president of learning, intending to perfect all this storie himselfe from
the Conquest, being called to a more serious expence of his time in
the great state affaires of his most royall ladie and soueraigne, left
the dispose thereof to M. Baldwine, M. Ferrers, and others, the
composers of these tragedies, who continuing their methode which
was by way of dialogue or interlocution betwixt euery tragedie, gaue
it onely place before the duke of Buckingham’s complaint, which
order I since hauing altered, haue placed the induction in the
beginning,[71] with euery tragedie following, according to succession
and the iust computation of time, which before was not obserued;
and lest any one thinke me envious of other’s deserts, I haue
subscribed the names of all such as I could heare of, vnder such
tragedies as each one particularlie hath written; which at the request
of the printer, I haue briefely perused as the former. In which (friendly
reader) if I haue done amisse, I craue pardon for my ouersight,
hoping, if paines will in stead of penance pacifie thee, to yield thee
satisfaction and content in my additions following, to which I refer
thee.
R. N.
The falle of Robert Tresilian chiefe
justice of England, and other his
fellowes, for misconstruing the lawes,
and expounding them to serue the
prince’s affections. Anno 1388.[72]
1.
In the ruefull[73] register of mischiefe and mishap,

Baldwine we beseech thee with our names to begin,
Whom vnfriendly fortune did trayn vnto a trap,
When wee[74] thought our state most stable to haue bin:
So lightely leese they all, which all do weene to win:
Learne by vs ye laweyers and judges of this land,[75]
Vpright and vncorrupt[76] in dome alway to stand.
2.
And print yee this president[77] to remaine for euer,

Enrolle and record it in tables made of brasse,
Engraue it in marble that may bee razed neuer,
Where the judges[78] of the lawe may see, as in a glasse,
What guerdon is for guile,[79] and what our wages was,
Who for our prince’s pleasure,[80] corrupt[81] with
meede and awe,
Wittingly and wretchedly[82] did wrest the sence of
lawe.
3.
A chaunge more newe or straunge when was there euer
seene,
Then judges from the bench to come downe to the barre,
And counsaylours that were most nigh to king and
queene
Exiled their countrye, from court and counsaile farre:
But such is fortune’s play, which can both make and
marre,
Exalting to most highe that was before moste lowe,
And turning tayle agayne, the lofty downe to throwe.[83]
4.
And such as late afore, could[84] stoutly speake and

pleade
Both in court and countrye, carelesse of the triall,
Stand muet as[85] mummers[86] without aduise or reade,
All to seeke of shifting, by trauerse or denyall,[87]
Which haue seene the day, when,[88] for a golden ryall,
[89]
By finesse and conning, could haue made blacke[90]

seeme white,
And most extorted wrong to haue appeared right.[91]
5.
Whilst thus on bench aboue wee had the highest place,

Our reasons were to strong, for any to confute:
But when at barre beneath, wee came to pleade our
case,
Our wits were in the wane, our pleading very brute:
Hard it is for prisoners with judges to dispute:
When all men against one, and none for one shall
speake,
Who weenes himselfe most wise, shall haply bee to
weake.[92]
6.
To you therefore that sit, these fewe wordes will I say,

That no man sits so sure, but hee may haply stand:[93]
Wherefore whilst you haue place, and beare the swing,
and sway
By fauour, without rigour let poynts of lawe bee skan’d:
Pitty the poore prisoner that holdeth vp his hand,
Ne lade him not with law, who least of law hath
knowne,
Remember ere yee dye, the case may bee your owne.
[94]
7.
Behold mee vnfortunate forman of this flocke,[95]

Tresilian, sometime[96] chiefe justice of this land,
A gentleman by byrth,[97] no staine was in my stocke,
Locketon, Holte, and[98] Belknap, with other of my band,
Which the lawe and justice had wholly in our hand,
Under the second Richarde a prince of great estate,[99]
To whome and vs also, blinde fortune gaue the mate.
[100]
8.
In the common[101] lawes our skill was so profounde,

Our credite and autority such, and so esteemde,
That what wee[102] concluded[103] was taken for a
grounde,
Allowed was for lawe what so to vs best seemed,
Life, death, landes, goods,[104] and all by vs was
deemed:
Whereby with easy paine great gayne wee did in fet,
[105]
And euery thing was fishe, that came vnto our net.
9.
At sessions and at sises,[106] wee bare the stroake and

sway,
In patentes and commission, of quorum alwaye chiefe:
[107]
So that to whether syde soeuer wee did way,
Were it by right or wrong, it past, without repriefe:
The true man wee let hang[108] somewhiles to saue a
thiefe,
Of gold, and of siluer, our handes were neuer empty,
Offices, fermes, and fees, fell to vs in great plenty.
10.
But what thing may suffice vnto the greedy man?

The more hee hath in hold, the more hee doth desire:
Happy and twise happy is hee, that wisely can
Content himselfe with that, which reason doth require,
And moyleth for no more then for his needefull hire:
But greedines of minde doth seldome keepe[109] the
syse,
To whom enough and more doth neuer well suffice.[110]
11.
For like as dropsy pacients drinke and still bee dry,

Whose vnstaunchst thirst no liquor can alay,
And drinke they nere so much, yet thirst they by and by:
[111]
So catchers and snatchers[112] toile both night and day,

Not needy, but greedy, still prolling[113] for their pray:
O endlesse thirste of gold, corrupter of all lawes,
What mischiefe is on moulde whereof thou art not
cause?
12.
Thou madest vs forget the fayth of our profession,[114]

When sergeants wee were sworne to serue the common
lawe,
Which was, that in no point wee should make
digression[115]
From approued principles, in sentence nor in sawe:
But wee vnhappy wightes[116] without all dread and awe
Of the judge eternall, for worlde’s vaine promotion,
More to man then God did beare our whole deuotion.
[117]
13.
The lawes wee did interprete[118] and statutes of the

land,
Not truely by the texte, but newly by a glose:
And wordes that were most playne, when they by vs
were skand,
Wee tourned by construction to[119] a Welshman’s hose,
Whereby many a one[120] both life and land did lose:
Yet this wee made our meane to mount aloft on mules:
And seruing times and turnes peruerted lawes and
rules.[121]
14.
Thus climing and contending alway to the toppe,

From hie vnto higher, and then to bee most hye,
The honny dewe of fortune so fast on vs did droppe,
That of king Richarde’s counsayle wee came to bee most
nye:[122]
Whose fauour to attayne wee[123] were full fine and slye:
Alway to his profite[124] where any thing[125] might
sounde,
That way (all were it wrong) the lawes[126] wee did
expounde.
15.
So working lawe like waxe, the subiect was not sure

Of life, land,[127] nor goodes but at the prince’s will,
Which caused his kingdome the shorter time to dure:
For clayming power absolute both to saue and spill,
The prince thereby presumed his people for to pill,
And set his lustes for lawe, and will had reason’s place,
No more but hang and drawe, there was no better
grace.
16.
Thus the king outleaping the limits of his lawe,

Not raigning but raging, as youth[128] did him entice,
Wise and worthy persons from court did dayly drawe,
Sage counsayle set at naught, proude vaunters were in
price,
And roysters bare the rule, which wasted all in vice:
Of ryot and excesse, grewe scarsity and lacke,
Of lacking came taxing, and so went welth to wracke.
[129]
17.
The barons[130] of the land not bearing this abuse,

Conspiring with the commons assembled by assent,
And seeing neyther reason,[131] nor treaty, could induce
The king in any thing his rigour to relent,
Maugre[132] his might they[133] calde a parliament:
Franke and free for all men without checke[134] to
debate
As well for weale publique, as for the prince’s state.
18.
In this[135] high assembly, great thinges were proponed

Touching the prince’s state, his regalty[136] and crowne,
By reason that the king[137] (which much was to be
moned)
Without regarde at all, of honour or renowne,
Misledde by ill aduice, had tournde all vpside downe,
For surety of whose state, them thought it did behoue
His counsaylours corrupt by reason[138] to remoue:[139]
19.
Among whome, Robert Veer[140] calde duke of Irelande,

With Mighell Delapole of Suffolke newe made earle,
Of Yorke also the archbishop, dispacht were out of
hande,[141]
With Brembre of London a full vncurteous churle:[142]
Some learned in the lawe in exile they did hurle:
But I poore[144] Tresilian (because I was the chiefe)
Was dampned to the gallowes most vily as[145] a
thiefe.
20.
Lo the fine of falshood, [the] stipend of corruption,

The fee of dowble fraude,[146] the fruites it doth procure:
Yee judges vpon earth,[147] let our iuste punition[148]
Teach you to shake off bribes, and kepe your handes
pure:[149]
Riches and promotion bee vayne thinges and vnsure,
The fauour of a prince is an vntrusty staye,
But iustice hath a fee that shall remayne alway.
21.
What glory can bee greater before God[150] or man,
Then by pathes of justice[151] in iudgement to proceede?
So duely and so truely[152] the lawes alway[153] to skan,
[154]
That right may take his place without regarde[155] or

meede:
Set apart all flattery and vayne wordly dreede,
Set[156] God before your eyes the iuste[157] judge
supreme,
Remembre well your reckoning at the day extreme.
22.
Abandon all affray, bee soothfast in your sawes,

Be constant, and carelesse of mortall men’s displeasure,
[158]
With eyes shut and handes close[159] you should

pronounce the lawes:
Esteeme not worldly goodes,[160] thinke there is a
treasure
More worth then golde [or stone] a thousand times in
valure
Reposed for all such as righteousnes ensue,
Whereof you can not fayle, the promise made is true.
23.
If judges in our dayes woulde ponder well in minde

The fatall fall of vs, for wresting lawe and right,
Such statutes as touche life should not bee thus definde,
By sences constrayned against true meaning quite,
As well they might affirme the blacke for to bee white:
Wherefore wee wish they woulde our acte and end
compare,
And weying well the case, they will wee trust beware.
[161]
G. F.[162]
ROGER MORTIMER.
[When maister Ferrers had finished his[163] tragedy,[164] which
seemed not vnfit for the persons touched in the same: another,
which in the meane time had stayed vpon sir Roger Mortimer,
whose[165] miserable ende (as it shoulde appeare) was somwhat
before the others, sayed as foloweth: “Although it be not greatly
appertinent to our purpose,[166] yet in my iudgement I thinke it
woulde doe well to obserue the times of men, and as they be more
auncient, so to place them.[167] For I finde that before these, (of
whome maister Ferrers here hath spoken) there were two Mortimers,
[168] the one[169] in Edwarde[170] the iij. time, out of our date; an
other slayne in Ireland in Richarde the seconde’s time,[171] a yeare

before the falle of these iustices: whose history sith it is notable, and
the example fruitefull, it were not good to ouerpasse it: and therefore
by your licence and agreemente,[172] I will take vpon mee the
personage of the laste, who full of woundes mangled,[173] with a
pale countenaunce, and griezly looke, may make his mone to
Baldwine, as foloweth.”[174]]
How the two Rogers, surnamed
Mortimers, for their sundry vices
ended their liues vnfortunately, the
one An. 1329, the other, 1387.[175]
1.
Among the riders of[176] the rolling wheele

That lost their holdes, Baldwine, forget not mee,
Whose fatall thred false fortune needes would reele,[177]
Ere it were twisted by the sisters three:
All folke be fraile, their blisses brittle bee:
For proofe whereof, although none other were,
Suffise may I, sir Roger Mortimer.
2.
Not hee that was in Edwarde’s dayes the thyrde,

Whom fortune brought to boote and eft to bale,[178]
With loue of whome, the king so much shee sturde,
That none but hee was heard in any tale:[179]
And whiles shee smooth blew on this pleasaunt gale,[180]
Hee was created earle of March, alas,
Whence enuy sprang which his destruction was.[181]
3.
For welth breedes[182] wrath, in such as welth doe want,

And pride with folly in[183] such as it possesse,
Among a thousand shall you finde one[184] skant,
That can in welth his lofty harte represse,
Which in this earle due proofe did playne expresse:
For whereas hee was somewhat haut before,[185]
His high degree hath made him now much more.[186]
4.
For now alone hee ruleth as him lust,

Ne recketh[187] for reade, saue of king Edwarde’s
mother:[188]
Which forced enuy foulder[189] out the rust,
That in men’s hartes before[190] did lye and smother:
The peeres, the people, as well the one as other,[191]
Against him made so haynous a complaynt,
That for a traytour hee was taken and attaynt.[192]
5.
Then all such faultes as were forgot afore,[193]

They skowre afresh, and somwhat to them adde:
For cruell enuy[194] hath eloquence in store,
When fortune bids to worse things meanly badde:[195]
Fiue haynous crimes agaynst him soone were had,
First, that hee causde the king to yeelde the Scot,
To make a peace, townes that were from him got:[196]
6.
And therewithall the charter called Ragman,

That of the Scots hee had[197] bribed priuy gayne,[198]
That through[199] his meanes sir Edwarde of Carnaruan,
In Barkeley castle most[200] trayterously was slaine:
That with his prince’s mother hee had layne,
And finally with polling[201] at his pleasure,
Had robde[202] the king and commons of theyr
treasure.
7.
For these things lo, which erst were out of minde,

Hee was condempned,[203] and hanged at the last,[204]
In whome dame fortune fully shewed her kinde,
For whom shee heaues shee hurleth downe as fast:
If men to come would learne by other past,
This cosin of mine might[205] cause them set aside
High climing, bribing, murdering, lust, and pride.[206]
8.
The finall cause why I this processe tell,

Is that I may bee knowen from this other,
My like in name, vnlike mee, though hee fell,
Which was I thinke[207] my grandsire, or his brother:
To count my kin, dame Phillip was my mother,
Deare[208] daughter and heyre of douty Lionell,
The second son of a king who did[209] excell.[210]
9.
My father hight sir Edmund Mortimer,

True[211] earle of March, whence I was after earl
By iust[212] discent, these two my parentes were,
Of which the one of knighthood bare the ferll,
Of womanhood the[213] other was the pearle:
Through theyr desert so calde of euery wight,
Till death them tooke, and left mee in[214] theyr right.
[215]
10.
For why th’attaynter of my[216] elder Roger,
(Whose shamefull death I tolde you but of late)
Was founde to bee vniuste, and passed ouer,[217]
Agaynst the lawe, by those that bare him hate:
For where by lawe the lowest of[218] free estate
Should personally bee hearde ere iudgement passe,
They barde him this, where through distroyde he was.
[219]
11.
Wherefore by doome of court in[220] parliament,

When we had prou’de our cosin ordered thus,[221]
The king, the lordes, and commons, of assent
His lawles death vnlawfull did discusse:
And both to bloud and good restored vs:
A president most worthy, shewed, and lefte
Lordes liues to saue, that laweles might bee refte.[222]
12.
While fortune thus did forder mee a mayne,[223]

King Richarde’s grace, the second of that[224] name,
(Whose dissolute[225] life did soone abridge his raine)
[226]
Made mee his mate in earnest and in game:
The lordes themselues so well allowed the same,
That through my titles duely comming downe,
I was made heyre apparant to the crowne.
13.
Who then but I was euery where esteemed?

Well was the man that might with mee acquaynt,[227]
Whom I allowed, as lordes the people deemed:
To whatsoeuer folly had me bent,
To like it well the people did assent:[228]
To mee as prince attended great and small,
I hoapt[229] a day would come to pay for all.
14.
But seldome ioy continueth trouble voyde,

In greatest charge cares greatest doe ensue,
The most possest are euer most anoyde,
In largest seas sore tempestes lightly brue,
The freshest coulours soonest fade the hue,[230]
In thickest place is made the deepest wounde,
True proofe whereof my selfe too soone haue founde.
15.
For whilst fayre fortune luld[231] mee in her lap,

And gaue mee giftes more then I did require,
The subtile queane[232] behinde mee set a trap,
Whereby to dash[233] and lay all in the myre:
The Irish men[234] agaynst mee did conspyre,
My landes of Vlster fro mee to haue refte,
Which heritage my mother had mee lefte.[235]
16.
And whiles I there, to set all thinges in stay,

(Omit my toyles and troubles thitherwarde)
Among mine owne with my retinue lay,
The wylder men, whom litle I did regarde,[236]
(And had therefore the reckles man’s rewarde)[237]
When least I thought set on mee in such numbre,
That fro my corps my life they rent asunder.[238]
17.

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Havels Learning System Study Notes

This document should be read in conjunction with the corresponding reading in

©2020 Havels Learning System

©2020 Havels Learning System

© IFT. All rights reserved 2

Interpretation of the graph:

© IFT. All rights reserved 3

Before we go further, let us refresh a basic mathematical principle. Consider a simple

© IFT. All rights reserved 4

These scenarios are shown in the figure below:

© IFT. All rights reserved 5

Factors that affect Demand Elasticity

© IFT. All rights reserved 6

© IFT. All rights reserved 7

© IFT. All rights reserved 8

2.5. Substitution and Income Effects

© IFT. All rights reserved 9

3. Supply Analysis: The Firm

© IFT. All rights reserved 10

© IFT. All rights reserved 11

Economic profit = Accounting profit – Total implicit opportunity costs

© IFT. All rights reserved 12

• In a perfectly competitive market, MR = AR = P. Price is constant. This implies that

© IFT. All rights reserved 13

Interpretation of the graph:

© IFT. All rights reserved 14

Interpretation of the graph:

© IFT. All rights reserved 15

© IFT. All rights reserved 16

𝐐𝐦𝐚𝐱 is the profit-maximizing quantity where MR = MC and MC is rising.

© IFT. All rights reserved 17

Interpretation of the graph:

© IFT. All rights reserved 18

In the short run:

© IFT. All rights reserved 19

Interpretation of the graph:

© IFT. All rights reserved 20

The factors contributing to diseconomies of scale are as follows:

© IFT. All rights reserved 21

© IFT. All rights reserved 22

© IFT. All rights reserved 23

2. A demand function for chairs is as follows: Qchairs = 200 − 2Pchairs + 0.05Income −

© IFT. All rights reserved 24

© IFT. All rights reserved 25

© IFT. All rights reserved 3

Perfect Monopolistic Oligopoly Monopoly

© IFT. All rights reserved 4

In the ruefull[73] register of mischiefe and mishap,

And print yee this president[77] to remaine for euer,

And such as late afore, could[84] stoutly speake and

By finesse and conning, could haue made blacke[90]

Whilst thus on bench aboue wee had the highest place,

To you therefore that sit, these fewe wordes will I say,