Market framework

Question 1

HOW IS THE DEMAND FOR

SECURITIES DETERMINED?

Answer 1

– Definition: the demand for a security is a schedule of prices and quantities demanded by investors at all possible prices.
– the demand is determined by summing the individual schedules for all investors in the market
• Price and quantity negatively related - law of demand
• Demand curve shows relationship between price and quantity demanded (ceteris paribus) - see diagram ( it is just a demand graph)

Question 2

Market Supply

Answer 2

• Market Supply - supply of asset can be described by schedule of prices and quantity supplied
• Quantity supplied and price positively related - law of supply
• Market supply is combination of all
individual investors supply schedules
• supply curve shows relationship between price and quantity supplied of asset

Question 3

MARKET DEMAND AND SUPPLY

Answer 3

• Changes in Demand -
1. Movement on curve - price change,
2. Shift in curve - EXPECTATIONS CHANGE, income change, change in price of related products
• Change in supply -
1. Movement on curve - price change,
2. Shift in Curve – EXPECTATIONS CHANGE, input price change, change in industry structure
• change in equilibrium - change in price and quantity