last edited 3/00 supply, demand and market equilibrium by: thomas gruca - university of iowa mark...

Last edited 3/00www.biz.uiowa.edu/iem/assignments

Supply, Demand and Market Equilibrium

By:

Thomas Gruca - University of Iowa

Mark Pelzer - Kirkwood Community College


Demand: Raw data

Name Quantity Maximum pricewilling to pay

Mary 1 4

Bob 1 1

Jane 1 5

Ed 1 3

Alice 1 21


Demand Schedule

Price Quantity Total QuantityDemanded

5 1 1

4 1 2

3 1 3

2 1 4

1 1 51


Demand Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D


Demand: Definition

• Relationship between price and quantity demanded at a given price


Demand Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D


Demand Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

I

D


Change in quantity demanded due to change in price

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

I

II

D


Shifts in the Demand Curve

• income

• related goods

• tastes

• number of consumers

• expectations of future prices


Demand curve shifts to the right

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D


Demand curve shifts to the left

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D


Demand for an intangible good

• For example, a promise exchanged for money

• Value of the promise depends on future events

• Examples– loans– insurance


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


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


Graph of Bradley demand data

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0 5 10 15 20 25 30 35 40

Quantity Demanded

Pri

ce


The effect of NBA party on demand for Bradley contracts

00.05

0.10.15

0.20.25

0.30.35

0.4

0 5 10 15 20 25 30 35 40

Quantity Demanded

Pric

e


Supply: Raw dataCompany Name Quantity Minimum price

willing to accept

ADC 1 3

SSW 1 2

QWE 1 5

YYJ 1 1

AQD 1 41


Supply Schedule

Price Quantity Total QuantitySupplied

1 1 1

2 1 2

3 1 3

4 1 4

5 1 51


Supply Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity supplied

Pri

ce

S


Supply: Definition

• Relationship between price and quantity supplied at a given price


Supply Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity supplied

Pri

ce

I

S


Change in quantity supplied due to a change in price

0

1

2

3

4

5

6

1 2 3 4 5

Quantity supplied

Pri

ce

I

II

S


Shifts in the Supply Curve

• prices of relevant resources

• technology

• taxes

• number of sellers

• expectations of future prices


Supply curve shifts to the right

0

1

2

3

4

5

6

1 2 3 4 5

Quantity supplied

Pri

ce

S


Supply curve shifts to the left

0

1

2

3

4

5

6

1 2 3 4 5

Quantity supplied

Pri

ce

S


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


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


Graph of Bradley supply data

0

0.1

0.2

0.3

0.4

0.5

0.6

0 5 10 15 20 25 30 35

Quantity supplied

Pri

ce


Effect of internet taxes on supply of Bradley contracts

0

0.1

0.2

0.3

0.4

0.5

0.6

0 5 10 15 20 25 30 35

Quantity supplied

Pri

ce


A Market

0

1

2

3

4

5

6

1 2 3 4 5

Quantity

Pri

ce

S

D


Surplus

0

1

2

3

4

5

6

1 2 3 4 5

Quantity

Pri

ce

S

D

Surplus

Qd Qs


Market adjustment to surplus

0

1

2

3

4

5

6

1 2 3 4 5

Quantity

Pri

ce

S

D

Surplus

Qd Qs


Shortage

0

1

2

3

4

5

6

1 2 3 4 5

Quantity

Pri

ce

S

DShortage

QdQs


Market adjustment to shortage

0

1

2

3

4

5

6

1 2 3 4 5

Quantity

Pri

ce

S

DShortage

Qd Qs


Equilibrium

0

1

2

3

4

5

6

1 2 3 4 5

Quantity

Pri

ce

S

D

Eq.Q

Eq.P


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?


Equilibrium in the Bradley marketBradley Nomination Market (6/99-9/99)

0

0.1

0.2

0.3

0.4

0.5

0.6

0 10 20 30 40Quantity

Pri

ce

S

D


Supply and demand information available in a real market

Price

Quantity

S

D

Exchangesthat already have occurred

Offers to sell (ask price)

Offers to buy (bid price)

Market price (observed)


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


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


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. 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


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


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


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


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?)

last edited 3/00 supply, demand and market equilibrium by: thomas gruca - university of iowa mark...

Documents

demand curve d slide

demand schedule slide

real demand curve slide

supply curve s slide

supply schedule slide

given price slide

right d slide

left d slide