Posts Tagged ‘Demand And Supply’

Summary

Tuesday, August 17th, 2010


We have now examined both demand and supply under competitive conditions (in this chapter); these concepts are summarized in Figure 7-11. We are now ready to consider how demand and supply interact, by putting them together, as in Figure 7-12.

Figure 7-11 Supply and demand schedules for steak in Cantown, March 1982

Demand

The Relationship between the price of the product and the number of units buyers will offer to buy

Price of steak per kilogram                                                              Quantity demanded (kilograms)

$10                                                                                                            20,000

8                                                                                                             30,000

6                                                                                                             50,000

4                                                                                                             80,000

2                                                                                                           120,000

Supply

The Relationship between the price of the product and the number of units producers will offer to sell

Price of steak per kilogram                                                             Quantity supplied (kilograms)

$10                                                                                                        100,000

8                                                                                                            80,000

6                                                                                                            50,000

4                                                                                                            20,000

2                                                                                                                  0

As the supply and demand schedules in Figure 7-12 show, the price of steak will tend to settle at $6 per kilogram. This is called the equilibrium price. It is not possible for the price to stabilize at any other level, because all other prices lead to either a shortage or a surplus.

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Banker Preference for Early Maturing Securities

Friday, December 4th, 2009


But there is the danger that when the banker decides to sell his securities the prevailing market price will be unfavorable, and that he will be obliged to accept a price lower than the one he himself paid for them. The fact is that the market price of bonds shifts about constantly, in accordance with shifts of supply and demand. The face value of a bond, the amount which the bondholder is to receive on its maturity, never changes, but he will only receive that sum at the time specified as the redemption date. If he wishes to sell the bond before then, he must sell it in the market for whatever price investors are prepared to pay. That price will reflect the prevailing demand and supply situation, and may be substantially above or below the bond’s face value.

In the case of bonds which are due to be redeemed in the near future, the divergence between market price and face value is unlikely to be large. Very soon the bondholder will receive the face value, and he would be unwilling to sell now for very much less. In the case of bonds which are due for redemption only in the distant future, however, the divergence between market price and face value may be very great. There is no assurance that the holder will soon receive a specified amount of money for the bond; for a long time to come its market price will be determined by the vagaries of demand and supply.

To avoid the possibility of having to sell securities at a heavy loss, banks prefer to hold those which will mature within a year or two. Because of the proximity of their redemption dates, the prices of such bonds cannot diverge too greatly from their respective face values. The banks, therefore, generally prefer to purchase short term bonds, or long term bonds which were issued a long time before, and are therefore due to mature in the near future. Canadian banks also purchase large quantities of federal government Treasury Bills, most of which have a maturity period of only 91 days.

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