1. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply, Demand and Market Equilibrium By: Thomas Gruca - University of Iowa Mark Pelzer - Kirkwood Community College

2. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand: Raw data

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

4. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand Curve D

5. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand: Definition Relationship between price and quantity demanded at a given price

6. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand Curve D

7. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand Curve I D

8. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Change in quantity demanded due to change in price I II D

9. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Shifts in the Demand Curve income related goods tastes number of consumers expectations of future prices

10. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand curve shifts to the right D

11. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand curve shifts to the left D

12. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Demand for an intangible good For example, a promise exchanged for money Value of the promise depends on future events Examples –loans –insurance

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

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

15. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Graph of Bradley demand data

16. Last edited 3/00 www.biz.uiowa.edu/iem/assignments The effect of NBA party on demand for Bradley contracts

17. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply: Raw data

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

19. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply Curve S

20. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply: Definition Relationship between price and quantity supplied at a given price

21. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply Curve I S

22. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Change in quantity supplied due to a change in price I II S

23. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Shifts in the Supply Curve prices of relevant resources technology taxes number of sellers expectations of future prices

24. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply curve shifts to the right S

25. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply curve shifts to the left S

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

28. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Graph of Bradley supply data

29. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Effect of internet taxes on supply of Bradley contracts

30. Last edited 3/00 www.biz.uiowa.edu/iem/assignments A Market S D

31. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Surplus S D QdQs

32. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Market adjustment to surplus S D Surplus QdQs

33. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Shortage S D QdQs

34. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Market adjustment to shortage S D Shortage QdQs

35. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Equilibrium S D Eq.Q Eq.P

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

37. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Equilibrium in the Bradley market

38. Last edited 3/00 www.biz.uiowa.edu/iem/assignments 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. Last edited 3/00 www.biz.uiowa.edu/iem/assignments Supply and demand information available in a real market Price Quantity S D Eq.QEq.Q +1 Best Ask Best Bid Last Trade Note: Eq.Q. is equilibrium quantity

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

41. Last edited 3/00 www.biz.uiowa.edu/iem/assignments 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 BRADLEY0.3100.3240.3110.3110.3230.314 GORE0.6820.6940.6820.6810.6980.682 DCROF0.0020.0030.0020.0020.0020.002 DCROF is a contract for candidates other than Gore and Bradley

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