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Basic principles of supply and demand curve

Basic principles of supply and demand curve

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  • 1. Supply, Demand and Market Equilibrium
  • 2. Last edited 3/00
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    Demand: Raw data
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    Demand Schedule
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    Demand Curve
    D
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    Demand: Definition
    Relationship between price and quantity demanded at a given price
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    Demand Curve
    D
  • 7. Last edited 3/00
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    Demand Curve
    I
    D
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    Change in quantity demanded due to change in price
    I
    II
    D
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    Shifts in the Demand Curve
    income
    related goods
    tastes
    number of consumers
    expectations of future prices
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    Demand curve shifts to the right
    D
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    Demand curve shifts to the left
    D
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    Demand for an intangible good
    For example, a promise exchanged for money
    Value of the promise depends on future events
    Examples
    loans
    insurance
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    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
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    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 their own prediction of a particular outcome
    Assignment: graphing a real demand curve
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    Graph of Bradley demand data
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    The effect of NBA party on demand for Bradley contracts
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    Supply: Raw data
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    Supply Schedule
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    Supply Curve
    S
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    Supply: Definition
    Relationship between price and quantity supplied at a given price
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    Supply Curve
    S
    I
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    Change in quantity supplied due to a change in price
    S
    II
    I
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    Shifts in the Supply Curve
    prices of relevant resources
    technology
    taxes
    number of sellers
    expectations of future prices
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    Supply curve shifts to the right
    S
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    Supply curve shifts to the left
    S
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    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. Last edited 3/00
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    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
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    Graph of Bradley supply data
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    Effect of internet taxes on supply of Bradley contracts
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    A Market
    S
    D
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    Surplus
    S
    Surplus
    D
    Qd
    Qs
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    Market adjustment to surplus
    S
    Surplus
    D
    Qd
    Qs
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    Shortage
    S
    D
    Shortage
    Qd
    Qs
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    Market adjustment to shortage
    S
    D
    Shortage
    Qd
    Qs
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    Equilibrium
    S
    Eq.P
    D
    Eq.Q
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    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?
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    Equilibrium in the Bradley market
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    Supply and demand information available in a real market
    Exchanges
    that already
    have occurred
    S
    Offers to sell (ask price)
    Market price (observed)
    Price
    Offers to buy (bid price)
    D
    Quantity
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    Supply and demand information available in a real market
    Price
    S
    Best Ask
    Last Trade
    Note: Eq.Q. is equilibrium quantity
    Best Bid
    D
    Quantity
    Eq.Q
    Eq.Q +1
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    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
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    IEM Prices: 12/10/99
    Market Quotes: DCONV00
    (2000 Democratic National Convention Market)
    Quotes current as of 15:45:05 CST, Friday, December 10, 1999.
    SymbolBidAskLastLowHighAverage
    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. Last edited 3/00
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    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. Last edited 3/00
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    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. Last edited 3/00
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    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. Last edited 3/00
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    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?)