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Basic principles of supply and demand curve

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- 1. Supply, Demand and Market Equilibrium<br />
- 2. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand: Raw data<br />
- 3. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand Schedule<br />
- 4. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand Curve<br />D<br />
- 5. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand: Definition<br />Relationship between price and quantity demanded at a given price<br />
- 6. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand Curve <br />D<br />
- 7. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand Curve <br />I<br />D<br />
- 8. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Change in quantity demanded due to change in price <br />I<br />II<br />D<br />
- 9. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Shifts in the Demand Curve<br />income<br />related goods<br />tastes<br />number of consumers<br />expectations of future prices<br />
- 10. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand curve shifts to the right<br />D<br />
- 11. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand curve shifts to the left <br />D<br />
- 12. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand for an intangible good<br />For example, a promise exchanged for money<br />Value of the promise depends on future events<br />Examples<br />loans<br />insurance<br />
- 13. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Demand for an intangible good <br />Application: a futures contract<br />value based on a future event<br />possible events<br />price of a bushel of wheat in October<br />Microsoft stock price on 3rd Friday of June<br />value of the Euro in $ on February 1st<br />price of oil on April 21st<br />
- 14. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Assignment<br />Political futures contract<br />pays $1 if Bradley is the Democratic nominee for 2000<br />pays $0 otherwise<br />Price that someone is willing to pay is based on their own prediction of a particular outcome<br />Assignment: graphing a real demand curve<br />
- 15. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Graph of Bradley demand data<br />
- 16. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />The effect of NBA party on demand for Bradley contracts<br />
- 17. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply: Raw data<br />
- 18. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply Schedule<br />
- 19. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply Curve<br />S<br />
- 20. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply: Definition<br />Relationship between price and quantity supplied at a given price<br />
- 21. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply Curve<br />S<br />I<br />
- 22. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Change in quantity supplied due to a change in price<br />S<br />II<br />I<br />
- 23. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Shifts in the Supply Curve<br />prices of relevant resources<br />technology<br />taxes<br />number of sellers<br />expectations of future prices<br />
- 24. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply curve shifts to the right<br />S<br />
- 25. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply curve shifts to the left<br />S<br />
- 26. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply for an intangible good <br />Simplified insurance example<br />Why would anyone supply car insurance?<br />Seller expects that you will not have an accident during the next year<br />If you do, they pay the bills. If not, they still keep the premium (price of policy)<br />Prices depend on how likely there will be a claim<br />
- 27. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Political Futures Contract<br />Recall our example political futures contract<br />People holding this contract get $1 if Bradley is the Democratic nominee for 2000 and $0 otherwise<br />They may be willing to sell if they are not 100% sure that Bradley will be the nominee<br />Assignment 4: graphing a real supply curve<br />
- 28. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Graph of Bradley supply data<br />
- 29. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Effect of internet taxes on supply of Bradley contracts<br />
- 30. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />A Market<br />S<br />D<br />
- 31. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Surplus<br />S<br />Surplus<br />D<br />Qd<br />Qs<br />
- 32. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Market adjustment to surplus<br />S<br />Surplus<br />D<br />Qd<br />Qs<br />
- 33. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Shortage<br />S<br />D<br />Shortage<br />Qd<br />Qs<br />
- 34. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Market adjustment to shortage<br />S<br />D<br />Shortage<br />Qd<br />Qs<br />
- 35. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Equilibrium<br />S<br />Eq.P<br />D<br />Eq.Q<br />
- 36. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Government interventions: Price controls<br />The government sets a maximum price<br />Example: the price of basic commodities in many countries (milk, flour, bread, rice)<br />what happens to the availability of this good?<br />The government sets a minimum price for wages <br />Example: minimum wage<br />what happens to the supply of labor?<br />
- 37. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Equilibrium in the Bradley market<br />
- 38. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply and demand information available in a real market<br />Exchanges<br />that already<br /> have occurred<br />S<br />Offers to sell (ask price)<br />Market price (observed)<br />Price<br />Offers to buy (bid price)<br />D<br />Quantity<br />
- 39. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Supply and demand information available in a real market<br />Price<br />S<br />Best Ask<br />Last Trade<br />Note: Eq.Q. is equilibrium quantity<br />Best Bid<br />D<br />Quantity<br />Eq.Q<br />Eq.Q +1<br />
- 40. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Iowa Electronic Market <br />The market for Bradley contracts is run by the Iowa Electronic Market<br />real $, real time futures market run by the Tippie Business School at the University of Iowa<br />web site: www.biz.uiowa.edu/iem<br />
- 41. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />IEM Prices: 12/10/99<br />Market Quotes: DCONV00<br />(2000 Democratic National Convention Market)<br />Quotes current as of 15:45:05 CST, Friday, December 10, 1999.<br />SymbolBidAskLastLowHighAverage<br />BRADLEY 0.310 0.324 0.311 0.311 0.323 0.314 <br />GORE 0.682 0.694 0.682 0.681 0.698 0.682<br />DCROF 0.002 0.003 0.002 0.002 0.002 0.002<br />DCROF is a contract for candidates other than Gore and Bradley<br />
- 42. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />Assignment 7<br />Choose one of the current markets running at the IEM<br />Read the prospectus to make sure you understand how the contracts work<br />Using various news sources, try to determine what events will affect prices in the IEM for two-weeks<br />Using your understanding of supply and demand, predict how prices should change<br />Determine if your predictions were correct and reconcile any discrepancies<br />
- 43. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />How do bid,ask prices happen?<br />The bid and ask prices you see on the IEM trading screen are offers to buy and sell posted by traders in the market.<br />Other information available includes:<br />last traded price<br />volume of trades<br />historical prices <br />
- 44. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />How do you get contracts to sell?<br />There are two ways to buy contracts<br />Buy a bundle of contracts from the market<br />each market has a set of contracts<br />only one will pay $1, all others pay 0$<br />keep the contracts that you think will pay off and sell the others<br />Buy from another trader<br />
- 45. Last edited 3/00<br />www.biz.uiowa.edu/iem/assignments<br />How do you make $ in the IEM markets?<br />Buy and hold those contracts which eventually pay $1<br />Buy contracts at a low price and sell them when the prices rise<br />Sell one of each contract when sum of all bid prices is greater than $1 (Why?)<br />

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