ECON 3430 Lecture Notes - Lecture 5: Demand Curve, Economic Equilibrium, Shortage
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10 Feb 2017
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Response of the quantity of an asset demanded to changes in wealth, expected returns, Holding all else constant, lower prices (higher interest rates) increases the quantity demanded of bonds. Interest rate and quantity demanded are inversely related. Holding all else constant, lower prices (higher interest rates), decreases the quantity supplied of bonds. Interest rate and quantity supplied are positive related. A market equilibrium occurs when the amount that people are willing to buy (demand) equals the amount that people are willing to sell (supply) at a given price. Bd = bs defines the equilibrium (or market clearing) price and interest rate. When bd > bs , there is excess demand, price will rise and interest rate will fall. When bd < bs , there is excess supply, price will fall and interest rate will rise. Wealth: growing wealth shifts the demand curve for bonds to the right.
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