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

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