Market Equilibrium,Supply,Demand

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Text of Market Equilibrium,Supply,Demand

  • 1. Supply, Demand andMarket Equilibrium By: Thomas Gruca - University of Iowa Mark Pelzer - Kirkwood Community College

2. Demand: Raw data 3. Demand Schedule 4. Demand Curve D 5. Demand: Definition

  • Relationship between price and quantity demanded at a given price

6. Demand CurveD 7. Demand CurveI D 8. Change in quantity demanded due to change in priceI II D 9. Shifts in the Demand Curve

  • income
  • related goods
  • tastes
  • number of consumers
  • expectations of future prices

10. Demand curve shifts to the right D 11. Demand curve shifts to the leftD 12. Demand for an intangible good

  • For example, a promise exchanged for money
  • Value of the promise depends on future events
  • Examples
    • loans
    • insurance

13. Demand for an intangible good

  • Application: a futures contract
    • value based on a future event
    • possible events
      • price of a bushel of wheat in October
      • Microsoft stock price on 3rd Friday of June
      • value of the Euro in $ on February 1st
      • price of oil on April 21st

14. Assignment

  • Political futures contract
    • pays $1 if Bradley is the Democratic nominee for 2000
    • pays $0 otherwise
  • Price that someone is willing to pay is based on theirownprediction of a particular outcome
  • Assignment: graphing a real demand curve

15. Graph of Bradley demand data 16. The effect of NBA partyon demand for Bradley contracts 17. Supply: Raw data 18. Supply Schedule 19. Supply Curve S 20. Supply: Definition

  • Relationship between price and quantity supplied at a given price

21. Supply Curve I S 22. Change in quantity supplied due to a change in price I II S 23. Shifts in the Supply Curve

  • prices of relevant resources
  • technology
  • taxes
  • number of sellers
  • expectations of future prices

24. Supply curve shifts to the right S 25. Supply curve shifts to the left S 26. Supply for an intangible good

  • Simplified insurance example
  • Why would anyone supply car insurance?
  • Seller expects that you will not have an accident during the next year
  • If you do, they pay the bills. If not, they still keep the premium (price of policy)
  • Prices depend on how likely there will be a claim

27. Political Futures Contract

  • Recall our example political futures contract
  • People holding this contract get $1 if Bradley is the Democratic nominee for 2000 and $0 otherwise
  • They may be willing to sell if they are not 100% sure that Bradley will be the nominee
  • Assignment 4: graphing a real supply curve

28. Graph of Bradley supply data 29. Effect of internet taxes on supply of Bradley contracts 30. A Market S D 31. Surplus S D Surplus Qd Qs 32. Market adjustment to surplus S D Surplus Qd Qs 33. Shortage S D Shortage Qd Qs 34. Market adjustment to shortage S D Shortage Qd Qs 35. Equilibrium S D Eq.Q Eq.P 36. Government interventions:Price controls

  • The government sets a maximum price
    • Example: the price of basic commodities in many countries (milk, flour, bread, rice)
    • what happens to the availability of this good?
  • The government sets a minimum price for wages
    • Example: minimum wage
    • what happens to the supply of labor?

37. Equilibrium in theBradley market 38. Supply and demand information available in a real market Price Quantity S D Exchanges that already have occurred Offers to sell (ask price) Offers to buy (bid price) Market price (observed) 39. Supply and demand information available in a real market Price Quantity S D Eq.Q Eq.Q +1 Best Ask Best Bid Last Trade Note: Eq.Q. is equilibrium quantity 40. Iowa Electronic Market

  • The market for Bradley contracts is run by the Iowa Electronic Market
    • real $, real time futures market run by the Tippie Business School at the University of Iowa
    • web site: www.biz.uiowa.edu/iem

41. IEM Prices: 12/10/99

  • Market Quotes: DCONV00
  • (2000 Democratic National Convention Market)
  • Quotes current as of15:45:05 CST, Friday, December 10, 1999 .
  • Symbol Bid Ask Last Low High Average
  • BRADLEY 0.310 0.324 0.311 0.311 0.323 0.314
  • GORE 0.682 0.694 0.682 0.681 0.698 0.682
  • DCROF 0.002 0.003 0.002 0.002 0.002 0.002
  • DCROF is a contract for candidates other than Gore and Bradley

42. Assignment 7

  • Choose one of the current markets running at the IEM
      • Read the prospectus to make sure you understand how the contracts work
      • Using various news sources, try to determine what events will affect prices in the IEM for two-weeks
      • Using your understanding of supply and demand, predict how prices should change
      • Determine if your predictions were correct and reconcile any discrepancies

43. How do bid,ask prices happen?

  • The bid and ask prices you see on the IEM trading screen are offers to buy and sell posted by traders in the market.
  • Other information available includes:
    • last traded price
    • volume of trades
    • historical prices

44. How do you get contracts to sell?

  • There are two ways to buy contracts
    • Buy a bundle of contracts from the market
      • each market has a set of contracts
      • only one will pay $1, all others pay 0$
      • keep the contracts that you think will pay off and sell the others
    • Buy from another trader

45. How do you make $ in the IEM markets?

  • Buy and hold those contracts which eventually pay $1
  • Buy contracts at a low price and sell them when the prices rise
  • Sell one of each contract when sum of all bid prices is greater than $1 (Why?)