Monday, April 16, 2018

Friday, April 13, 2018

Bond Prices & Interest Rates


If interest rates are falling then bond prices must be rising and if interest rates are rising, bond prices must be falling.

If the FED is buying bonds the NIR is falling, therefore bond prices must be rising.
If the FED is selling bonds the NIR is rising, therefore bond prices must be falling.

If the Demand for money is increasing, the NIR is increasing, and bond prices are falling.
If the Demand for money is decreasing, the NIR is decreasing, and bond prices are rising.

If Country A has a higher RIR than Country B, there will be an inflow of capital into Country A, increasing the supply of loanable funds, decreasing the RIR and therefore Bond prices will rise.
If Country A has a lower RIR than Country B, there will be an outflow of capital from Country A, decreasing the supply of loanable funds, increasing the RIR and therefore Bond prices will fall.


i. The Fed will buy bonds,, the MS increases and the NIR will fall. The Federal Funds Rate is the rate of interest that banks use when making  loans to each other.. If the NIR falls the FFR will fall.

ii. What happens to the price of bonds?? If interest rates fall, Bond prices rise.

When the FED buys bonds the NIR falls and Bond prices rise.

(a) When the demand for money decreases, the NIR will decrease.
(b) When NIR falls, Bond prices rise.

Saturday, September 16, 2017

Inelastic Demand

Inelastic Demand
Elasticity is all about the changes.
Elasticity Cheat Sheet here

**You must know the determinants.

Determinants of Inelastic Demand? 

Low Price 
The price of my favourite candy bar increased by 10%, I didn't notice.
  (My demand for my favourite candy bar is inelastic as a 10% price increase is such a low amount I don't notice it or let it change my preference)

The price of black beans increased by 20% and I don't care. 
(I love black beans and consider them a necessity in my kitchen. My demand for Shitto is inelastic)
I've eaten a lot of Shitto in my life.
I'm a Shitto magnet
Ok, that's enough.

Short (Time) Horizon
Sometimes you don't have the capacity to be shopping around for the lowest price.
(My demand for a toilet is inelastic when I have to go bad)

If a good is addictive then your desire for that good doesn't diminish very much if the price increases.
Therefore your demand for the good is inelastic.

Low Number of Substitutes
Often if something is unique or if the choices are limited then your demand will be inelastic.

**Know that the Inelastic Demand curve is drawn very steeply.
When Supply decreases the price for Petrol increases by a larger amount that the Quantity Demand,
There is no close substitute for Petrol, therefore the Demand is Inelastic
** Know that any and every demand curve has an elastic section and an inelastic section.
Recognise, that the inelastic section of the curve is at the lower prices, this often causes confusion but it shouldn't,,,
at low prices a 10% change in the price does' t really affect the amount we buy,, or our quantity demand.

**Know that Inelastic Demand means that the percentage change in quantity demand is less than the percentage price change. 
We can see that with a price increase, quantity demand has changed less
When you are demand inelastic you just don't react as much to a price change

** Know Perfectly Inelastic demand is that no matter the Price change (great or small) the same amount of a good will be bought.
** Understand that the PED of a perfectly inelastic curve is zero and that the PED for a relatively Inelastic demand is between zero and 1.

Perfectly Inelastic PED is zero (0) 
This makes sense in that with a price change there is a (0) % change in the quantity demanded

Relatively Inelastic Demand is a number between zero (0) and 1
Inelastic Demand = 0 < PED < 1
This makes sense as the % change in quantity demand is less than the % change in price  

Thursday, September 14, 2017

Wednesday, September 13, 2017

Demand & Supply Equilibrium

Demand & Supply Equilibrium
Kezia from Colorado asks me to take a shot at explaining just what the AP exam is looking for when it comes to Equilibrium.

Demand and Supply equilibrium, is with given shifts in demand and supply we can then tell what has happened to the price and quantity of a specific good.

First what we know:

Demand Decreases or Increases - What happens to the price and quantity?

When the demand shifts left (decreases) then the Price & Quantity decreases.
When demand shifts right (increases) then Price & Quantity increases.

Ok so far?

Supply Increases or Decreases   - What happens to price and quantity?

When the supply shifts right (increases) then the Price decreases & Quantity increases.
When supply shifts left (decreases) then Price increases & Quantity decreases.

Demand Increases and then Supply Increases, not once , not twice, but three times.
(Work with me, I'm trying to make a point)

Demand & Supply curve are originally in equilibrium at Point E1
The original Equilibrium point is at (E1)
Price is at PE1 
Quantity is at QE1

Demand Increases to D2

Demand Shifts Right (increases) 
Find the new equilibrium point (E2)
Price has increased to PE2 and Quantity has increased to QE2.
at this point we can say for certain that
Price has increased
Quantity has increased

 But, now Supply Increases (shifts right) to S2

Supply Shifts Right (increases) to S2
Find the new equilibrium point (E3)
Price decreases to PE3
Quantity Increases to QE3
Price originally increased to PE2 
but now decreases to PE3, so price is (Uncertain)
Quantity has definitely increased to QE3

and finally, Supply Increases again to S3

Supply Shifts right (increases) to S3
New equilibrium point is at E4
Price decreases to PE4
Quantity Increases to QE4
Price is Uncertain 
Quantity Increased

From the Demand & Supply Cheat Sheet here

Understand that you can either memorise these demand and supply shifts (not suggested) as they will not change.
So, If Demand increases and supply increases, 
then Price will be uncertain and quantity will increase.
This happens no matter how you draw the curves, close or far apart.

I suggest drawing the graphs as you read the questions, then look for the equilibrium points.

How does the AP exam test these questions.

1995 AP Exam
Answer - E

2008 AP Exam
Answer - D
Government increases tax - supply decreases
People commute longer distances - demand for gas increases