EconomicsEconomics

Supply and DemandSupply and Demand Supply and demand is perhaps one of the Supply and demand is perhaps one of the

most fundamental concepts of economics most fundamental concepts of economics and it is the backbone of a market economy. and it is the backbone of a market economy.

Supply and Demand Demand refers to how much (quantity) of Demand refers to how much (quantity) of

a product or service is desired by buyers. a product or service is desired by buyers. The quantity demanded is the amount of a The quantity demanded is the amount of a product people are willing to buy at a product people are willing to buy at a certain price; the relationship between certain price; the relationship between price and quantity demanded is known as price and quantity demanded is known as the demand relationship. the demand relationship.

Supply represents how much the market Supply represents how much the market can offer. The quantity supplied refers to can offer. The quantity supplied refers to the amount of a certain item producers the amount of a certain item producers are willing to supply when receiving a are willing to supply when receiving a certain price. certain price.

Supply and DemandSupply and Demand The correlation between price and how The correlation between price and how

much of a good or service is supplied to much of a good or service is supplied to the market is known as the supply the market is known as the supply relationship. Price, therefore, is a relationship. Price, therefore, is a reflection of supply and demand. reflection of supply and demand.

The relationship between demand and The relationship between demand and supply underlie the forces behind the supply underlie the forces behind the allocation of resources. In market allocation of resources. In market economy theories, demand and supply economy theories, demand and supply theory will allocate resources in the most theory will allocate resources in the most efficient way possible.efficient way possible.

Law of DemandLaw of Demand The law of demand states that, if all other factors remain The law of demand states that, if all other factors remain

equal, the higher the price of a good, the less people will equal, the higher the price of a good, the less people will demand that good. This is because of the idea of demand that good. This is because of the idea of opportunity cost.opportunity cost.

Law of SupplyLaw of Supply Like the law of demand, the law of supply Like the law of demand, the law of supply

demonstrates the quantities that will be sold at a demonstrates the quantities that will be sold at a certain price. The higher the price, the higher certain price. The higher the price, the higher the quantity supplied. Producers supply more at the quantity supplied. Producers supply more at a higher price because selling a higher quantity a higher price because selling a higher quantity at a higher price increases revenue. at a higher price increases revenue.

EquilibriumEquilibrium When supply and demand are equal the economy is said to When supply and demand are equal the economy is said to

be at equilibrium. At this point, the allocation of goods is at be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being supplied is exactly the same as the amount of goods being demanded.demanded.

DisequilibriumDisequilibrium Market disequilibrium occurs when price or quantity Market disequilibrium occurs when price or quantity

are not at the market equilibrium. When this are not at the market equilibrium. When this happens you will either see a shortage or surplus of happens you will either see a shortage or surplus of an item. Shifts in the demand and supply curve can an item. Shifts in the demand and supply curve can also create disequilibrium. also create disequilibrium.

InflationInflation

In mainstream economics, the word In mainstream economics, the word ““inflationinflation” refers to a general rise in prices ” refers to a general rise in prices measured against a standard level of measured against a standard level of purchasing power.purchasing power.

In other words, an increase in the price of In other words, an increase in the price of things without an increase in what people things without an increase in what people get paid.get paid.

Consumer Price Index (CPI). This is a Consumer Price Index (CPI). This is a statistic tracked by the government which statistic tracked by the government which calculates what people are paying for things. calculates what people are paying for things.

Federal Reserve BoardFederal Reserve Board The Federal Reserve Board (FRB) is an The Federal Reserve Board (FRB) is an

independent regulatory agency for the US independent regulatory agency for the US government. It is made up of 12 representatives government. It is made up of 12 representatives from each of the federal reserve banks. The from each of the federal reserve banks. The current head is Ben Bernanke.current head is Ben Bernanke.

The FRB is in charge of interest rates, which The FRB is in charge of interest rates, which controls inflation.controls inflation.

Federal Reserve BoardFederal Reserve Board Monetary Policy– One of the most important jobs Monetary Policy– One of the most important jobs

that the Federal Reserve Board (FRB) has is to that the Federal Reserve Board (FRB) has is to monitor monetary policy in the US. The FRB was monitor monetary policy in the US. The FRB was established in 1913 to deal with bank panics. Bank established in 1913 to deal with bank panics. Bank panics happen when customers think that a bank panics happen when customers think that a bank is about to go out of business and the rush to is about to go out of business and the rush to withdraw their money. Because banks loan money withdraw their money. Because banks loan money that people put in savings accounts, they do not that people put in savings accounts, they do not have enough money to cover all the withdraws. have enough money to cover all the withdraws. This results in the bank collapsing. To prevent this This results in the bank collapsing. To prevent this from happening, the FRB require banks to put a from happening, the FRB require banks to put a certain amount of money in reserve account. The certain amount of money in reserve account. The amount in this account is based off of the amount amount in this account is based off of the amount of money the bank currently has loaned out. This of money the bank currently has loaned out. This creates a pool of money that can then be loaned to creates a pool of money that can then be loaned to other banks as they need it. other banks as they need it.

Federal Reserve BoardFederal Reserve Board Interest Rates – One of the most important things that Interest Rates – One of the most important things that

the FRB is in charge of is interest rates. The FRB has the FRB is in charge of is interest rates. The FRB has the ability to raise or lower interest rates. These the ability to raise or lower interest rates. These interest rates effect the cost of taking out a loan. interest rates effect the cost of taking out a loan.

Think of interest rates this way. The FRB can use Think of interest rates this way. The FRB can use these interest rates as a brake or gas pedal for the these interest rates as a brake or gas pedal for the economy. By raising rates the FRB slows the economy economy. By raising rates the FRB slows the economy down by making it more expensive to take out loans. down by making it more expensive to take out loans. By lowering interest rates, the FRB makes it cheaper By lowering interest rates, the FRB makes it cheaper to take out a loan and therefore can pick up the to take out a loan and therefore can pick up the economy. economy.

Why would the FRB want to slow the economy down? Why would the FRB want to slow the economy down? An economy that is growing too fast, tends to see An economy that is growing too fast, tends to see inflation occurring at high levels. To combat this the inflation occurring at high levels. To combat this the FRB attempts to slow economic growth, but not stop FRB attempts to slow economic growth, but not stop it.it.

How the Stock Market How the Stock Market WorksWorks When it comes to When it comes to

raising money to raising money to operate, businesses operate, businesses have two choices: take have two choices: take out a loan or join the out a loan or join the stock market.stock market.

If a company joins the If a company joins the stock market they start stock market they start with and initial public with and initial public offering (IPO). To do offering (IPO). To do this they cut their this they cut their company into many company into many pieces and sell the pieces and sell the pieces off. If you buy pieces off. If you buy stock in a company it is stock in a company it is called a share. The called a share. The number of shares you number of shares you own determines how own determines how much power you have much power you have and your share of the and your share of the profits.profits.

How the Stock Market How the Stock Market WorksWorks

The most common The most common ways to make money ways to make money in the stock market is in the stock market is buy low and sell buy low and sell high, and dividends high, and dividends (your cut of the (your cut of the profit).profit).

Prices of a share are Prices of a share are based on supply and based on supply and demanddemand

Companies only Companies only make money from an make money from an IPO.IPO.

Companies can split Companies can split stock to create more stock to create more shares to sell.shares to sell.

Alternative Currency Alternative Currency

BitcoinsBitcoins

Stock Market GameStock Market Game

Everyone has $10000 to invest. Everyone has $10000 to invest. You can buy any stock that you want, as long You can buy any stock that you want, as long

as you can afford it.as you can afford it. Prices used will be the end of the day price Prices used will be the end of the day price

(close).(close). All sales and purchases must be given to Mr. All sales and purchases must be given to Mr.

Harris to be official.Harris to be official. The game will last until the end of the year.The game will last until the end of the year. The person(s) with the most money win extra The person(s) with the most money win extra

credit on the final.credit on the final.

What Happened? The World is experiencing one of the longest economic

slowdowns since the Great Depression. So what happened?

Recession - a significant decline in economic activity spread across the economy and lasting more than a few months. In judging whether the economy is in recession, the committee (National Bureau of Economic Research) looks at monthly data on real income, employment, industrial production, and wholesale and retail sales. Officially, the recession started in December 2007 and ended in June 2009, although the end date was announced on September 20, 2010.

September 11, 2001 – Between March 1991 and March 2001, the United States saw its longest period of economic expansion, 120 consecutive months. When the terrorist attacks of Sept. 11 occurred, the public was unsure of what would happen next. Uncertainty is one of the worst things for an economy, and as a result of this uncertainty the economy started to slip even more.

What Happened? In response to this, the FRB moved

to significantly lower interest rates.

What Happened? As the FRB worked to stimulate the economy, the

dropped interest rates to record lows. This made credit readily available to almost anyone. The result was a boom in the housing industry. Old houses and new houses were being purchased at record levels. With demand so high, many areas saw house price more than double.

Subprime Loans – In the United States, when you take out a loan, the interest rate on the loan is based on your credit score. Any loan given to someone that has a low credit score for any reason is considered a subprime loan. Things that can effect your credit score include, bankruptcy, late payments, using up too much credit, and foreclosure. Subprime loans are seen as risky, but are still made by some lending institutions because they can charge higher interest rates. This means that if the loans get paid off they make more profit.

What Happened? As the housing

markets grew, more and more people became involved in loaning out money. People also began to invest more in housing. This continued increase in demand resulted in even higher home prices. Many of these loans were ARM’s that were taken out with the thought that they could resell the house before the teaser rate ended.

What Happened As the economy began to rebound, the FRB began to

raise interest rates to control speed of economic growth. As this happened, anyone who had taken out and Adjustable Rate Mortgage (ARM), saw their house payments jump. Not only that but many people were talked into and ARM by being given a low teaser rate. These new interest rate hikes came at the same time that many peoples teaser rates were ending. Some customers saw there house payments balloon by over several hundred dollars a month.

As the housing bubble began to pop, home buyers dried up and soon investors that were trying to sell homes and people trying to get out of homes they could no longer afford, found it difficult to get their money back. Soon, large numbers of home buyers began to default on their loans. This left banks with homes they were trying to sell at well below what they paid for them.

What Happened? For many years, banks have made money

by buying and selling loans. During the housing bubble, banking and investment companies saw buying subprime loans as a good way to make money. Unfortunately, as home owners began to default on these loans, the companies investing in them lost most of their investments. Some economists believe that by the time the crisis is over, homeowners will have defaulted on between $200billion and $300 billion. These loses have made credit more scarce.

What Happened? The Government has attempted to help

homeowners with various assistance programs. These programs attempted to work with the banks and the borrowers in an attempt to rework their payments. However most banks refused to change the loan and people were told to sell their house or get a better job. Either way only a small fraction of the estimated millions of homeowners in trouble were helped.

Usually the economy and the FRB can deal with a problem like this, however other factors began to complicate things. The biggest of these issues is oil.

What Happened? With oil price hitting all time highs, prices of

almost everything is going up. This is seen as inflationary pressure which is generally dealt with through higher interest rates. Unfortunately, to calm fears and make credit more available, the FRB has actually cut rates.

These issues have scared consumers, and a scared consumer doesn’t spend money. Economists will tell you however, that consumer spending is what drives the economy.

In response to this, the Federal Government decided to give tax rebates of about $600 per person, $1200 per couple, and $300 per child. Many economists feel this won’t help for a few reasons. First, the checks are really very small. Second, if consumers are scared then they would save the money. Third, many people will use it to pay bills which does not help the economy.

What Happened?What Happened? As more and more homeowners fell into As more and more homeowners fell into

foreclosure, banks and investors all over the foreclosure, banks and investors all over the country found themselves with houses that were country found themselves with houses that were worth less than what the homeowners originally worth less than what the homeowners originally paid for them. Many of the original lenders were paid for them. Many of the original lenders were not affected as most loans were bundled together not affected as most loans were bundled together and sold as an investment known as a and sold as an investment known as a collateralized debt obligation (CDO). collateralized debt obligation (CDO).

As banks started to fail and CDO’s defaulted, As banks started to fail and CDO’s defaulted, many people betting against the system maid many people betting against the system maid money. This was possible through a credit default money. This was possible through a credit default swap, which is a form of insurance for swap, which is a form of insurance for investments.investments.

The government then stepped forward with The government then stepped forward with emergency loans for banks and a stimulus emergency loans for banks and a stimulus package for the economy.package for the economy.

What HappenedWhat Happened Because credit default swaps were not Because credit default swaps were not

regulated, banks didn’t need to report how regulated, banks didn’t need to report how many swaps they had made. This meant many swaps they had made. This meant people didn’t know how healthy the banks people didn’t know how healthy the banks were. This froze the credit (loan) market.were. This froze the credit (loan) market.

With credit frozen, businesses began to With credit frozen, businesses began to slow down and had trouble running. This slow down and had trouble running. This scared investors and hurt the stock scared investors and hurt the stock market.market.

On September 15, 2008 Lehman Brothers On September 15, 2008 Lehman Brothers filed for bankruptcy. filed for bankruptcy.