Forex for a trader
Shifters of forex curves

Shifters of forex curvesStochastic oscillator (STOCH) The Stochastic Oscillator is an indicator of speed of changing or the Impulse of Price. %E = 100 * (N - LLV(n)) (HHV(n) - LLV(n)), where N - is the price of closing of the current period, LLV(n) - the lowest price within the last n periods, HHV(n) - the highest price within the last n periods, n - amount of periods (usually from 5 to 21), s - amount of periods of calculation of the moving average. It demonstrates the moments, when the price reaches the border of its trade diapason within predefined time period. It comprises 2 curve lines - the slow (%D) and the fast (%K). The Stochastic Oscillator also comprises 4 variables. They are the following: The number of time periods used in the stochastic calculation are called %K Periods. The number of time periods used when calculating the moving average of %K are called %D Periods. The interior smoothing of %K is being controlled by the value. A value of 3 is considered a slow stochastic. In addition, a value of 1 is considered a fast stochastic. %D Method helps to measure %D. It can consist of different kinds: Simple, Exponential, Time Series, Weighted, or Variable Triangular. One method when trading using the Stochastic Oscillator is to sell when the either line rises above 80 and then falls back below. Vice versa, purchase when either %K or %D decreases below 20 and then again reaches that level. Another way of action is to watch timing trades and to sell when the %K line shifts below the %D line and purchase when the %K line shifts over the %D line. Besides, you should always follow the discrepancies. For instance, if prices start reaching new peaks and the Stochastic Oscillator fails to surpass its previous peaks, the indicator usually demonstrate in which direction prices are moving.

An interval from 0 up to 100 comprises all the indicator's possible values. While building an indicator the two control levels are set on the chart where the top level is set at 80 and the low level is set on the 20. If STOCH lines cross it, then it demonstrates the oversell or overbuy situation in the market. The indicator demonstrates oversaturation with sell trades in the market, so the zone of purchases is started if STOCH lines shift below bottom control level. In addition, the indicator demonstrates oversaturation with purchase trades in the market, so the zone of sales is started if the STOCH lines shifts over the top control level. As a rule, they use the following interpretation of the indicator: If the curve %K crosses the curve %D from below upward, you should purchase. If the curve %K crosses a curve %D from top to downward, you should sell. If the oscillator %K or %D shifts below the line, and crosses again at the bottom level upwards, you should purchase. If the oscillator moves above the line, and then crosses the top level downwards, you should sell. The presence of discrepancy is when, for instance, the prices have reached new highs, and the values of oscillator turned out to be too weak for reaching new peak values. Free access to the FT. com. To gain free access register your interest here . Model agencies collude to fix rates. Regulators find leading model agencies guilty of price fixing. Report on the growth of alternative finance. The market for foreign exchange.

Currencies are bought and sold, just like other commodities, in markets called foreign exchange markets. The world’s three most common transactions are exchanges between the dollar and the euro (30%) the dollar and the yen (20%) and the dollar and the pound Sterling (12%). How currency values are established depends upon whether they are determined solely in free markets, called freely floating , or determined by agreements between governments, called fixed or pegged. Like most currencies, the pound has at times been both fixed, and floating. Between 1944 and 1971, most of the world’s currencies were fixed to the US Dollar, which in turn was fixed to gold. After a period of floating, the pound joined the European Exchange Rate Mechanism (ERM) in 1990, but quickly left in 1992, and has floated freely ever since. This has meant that its value is largely determined by the interaction of demand and supply. The demand for currency. The demand for currencies is derived from the demand for a country’s exports, and from speculators looking to make a profit on changes in currency values. The supply of currency.

The supply of a currency is determined by the domestic demand for imports from abroad. For example, when the UK imports cars from Japan it must pay in yen (?), and to buy yen it must sell (supply) pounds. The more it imports the greater the supply of pounds onto the foreign exchange market. A large proportion of short-term trade in currencies is by dealers who work for financial institutions. The London foreign exchange market is the World’s single largest international exchange market. The equilibrium exchange rate is the rate which equates demand and supply for a particular currency against another currency. If we assume the UK and France both produce goods that the other wants, they will wish to trade with each other. However, French producers require payment in Euros and the British producers require payments in pounds Sterling. Both need payment in their own local currency so that they can pay their own production costs in their local currency. The foreign exchange market enables both French and British producers to exchange currencies so that trades can take place.

The market will create an equilibrium exchange rate for each currency, which will exist where demand and supply of currencies equates. Changes in exchange rates. Changes in the value of a currency like Sterling reflect changes in demand and supply. On a demand and supply graph, the price of Sterling is expressed in terms of the other currency, such as the $US. An increase in the exchange rate. For example, an increase in exports would shift the demand curve for Sterling to the right and push up the exchange rate. Originally, one pound bought $1.50, but now buys $1.60, hence its value has risen. Exchange rates and interest rates. Changes in a country’s interest rates also affect its currency, through its impact on the demand and supply of financial assets in the UK and abroad. For example, higher interest rates relative to other countries, makes the UK attractive the investors, and leads to an increase in the demand for the UK’s financial assets, and an increase in the demand for Sterling. Conversely, lower interest rates in one country relative to other countries leads to an increase in supply, as speculators sell a currency in order to buy currencies associated with rising interest rates.

These speculative flows are called hot money , and have an important short-term effect on exchange rates. Foreign Currency Exchange: Supply and Demand for Currency. An error occurred trying to load this video. Try refreshing the page, or contact customer support. You must create an account to continue watching. Register for a free trial. As a member, you'll also get unlimited access to over 70,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed. Already registered? Login here for access. You're on a roll. Keep up the good work! Just checking in. Are you still watching? 0:33 Law of Demand 0:47 Law of Supply 1:30 Supply & Demand for Currency 2:12 Demand for Currency 3:50 Supply for Currency 4:59 Demand & Supply Changes. Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course. Recommended Lessons and Courses for You. Aaron has worked in the financial industry for 14 years and has Accounting & Economics degree and masters in Business Administration. He is an accredited wealth manager. Introduction to Foreign Currency Exchange. Have you ever been on vacation in a foreign country and wondered about the exchange rate? For example, why is it that a Canadian dollar is just about the same as a U. S. dollar, while a U. S. dollar is worth over 12 Mexican pesos? Where do these conversion rates come from anyway? Well, just like the price of any good, exchange rates are determined on open markets under the control of two forces: demand and supply. Remember the laws of demand and supply? The law of demand says that the demand for a good falls as the price rises and goes up as the price falls. We see this happen every year on Black Friday. So, price and demand are inversely related. Supply is simply the amount of goods owners or producers offer for sale.

The law of supply says that the quantity of a good supplied rises as the market price rises and falls as the price falls. In other words, price and supply are directly related: If price goes up, supply will increase; if price goes down, supply will decrease. The idea here is that when the price of something you own goes up, you're more inclined to sell it. Suppliers work the same way; if the price of a good that they produce goes up, then there is a higher incentive to sell more of that good. Supply and Demand for Currency. Just like the value of a good is determined by the supply and demand for that good, the value of a nation's currency is determined by the supply and demand for that currency. For example, during the 2012 Summer Olympics in London, tourism to England increased. That could have caused an increase in demand for the British pound and the value of the pound to rise. Generally, exchange rates vary as demand for goods from nations vary. More demand for British goods, for example, would change the demand for the British pound. Just as supply and demand dictate the value of a good, supply and demand will dictate the value of the British pound as well. What would you do if you could buy your school books at a lower price from a supplier in England than in the U. S.? You would probably go online and order the book from the British company and save money. But before you can buy your school books from the British supplier, you'll have to exchange your money for the British pound. Even if they accept U. S. dollars, the seller from England ultimately wants to be paid in pounds.

So, eventually the money will get exchanged. The better deal creates higher demand for English currency. The demand curve for British pounds in terms of the U. S. dollar is a normal downward sloping demand curve. This is because if the value of the British pound went down relative to the U. S. dollar, the quantity of pounds demanded by Americans would increase; when pounds go on sale, more pounds are sold! Pretty much the same idea behind the demand of a good. For Americans, British goods are less expensive when the pound is cheaper and the dollar is stronger. Assuming there is only trade between the U. S. and England, when the value of the British pound goes down, Americans will switch from American-made goods to British-made goods. But before we can purchase goods made in Britain, we have to exchange dollars for British pounds. Consequently, an increased demand for British goods is simultaneously an increase in the quantity of British pounds demanded. In other words, when the price of British pounds goes down, demand for British pounds goes up. On the flip side, the supply curve for British pounds in terms of the U. S. dollar is a normal upward sloping supply curve. If the value of the U. S. dollar went down, people from England would want to buy more of our goods. Their demand for U. S. dollars would go up, so they would supply or exchange more of their British pounds for U. S. dollars; thus, the supply of British pounds on the international market increases. To summarize, as more American goods are demanded, this causes a simultaneous increase in the supply of British pounds to purchase those goods.

Think of it like this: You have all the U. S. dollars in the world. The only way for someone from England to convert their pounds into dollars is to come to you and trade, so you end up with more British pounds than you had before. Effectively, the decrease in the value of the dollar has created a higher supply of pounds. From the perspective of the British, the supply curve of the British pound is really the demand curve of the U. S. dollar. Get FREE access for 5 days, just create an account. No obligation, cancel anytime. Select a subject to preview related courses: Demand and Supply Changes. Understanding how various events cause currencies to experience changes in supply and demand is very important in understanding how exchange rates change. An increase in the U. S. demand for the pound (like the example of cheaper books from England) creates a rightward shift of the demand curve and ultimately causes a rise in the exchange rate, increasing the value of the pound and decreasing the value of the dollar. This happens because you'd rather exchange your dollars and get pounds in return. Lower demand for dollars means lower value for the dollar; higher demand for pounds means higher value for the pound. Conversely, a fall in demand would shift the demand curve left and lead to a falling pound and rising dollar. This would happen if a non-British book supplier starts offering lower prices. On the supply side, an increase in the supply of pounds to the U. S. market causes a supply curve shift to the right. A new intersection for supply and demand occurs at a lower exchange rate, and the dollar appreciates against the pound because of the increased supply of pounds.

You can now buy more pounds with each dollar you have! A decrease in the supply of pounds shifts the curve leftward, causing the exchange rate to rise and the dollar to depreciate. Your dollars now buy fewer pounds! In summary, just like how prices are determined for goods at your local grocery store, so are the prices of currencies on exchange rates. The law of supply and demand guides the value and rates for dollars, pounds, yen, pesos and many other currencies. When individuals purchase goods from other countries or travel outside of their country's borders, they often must first convert their currency into foreign currency. As this happens, exchange rates vary just as demand for goods and services from nations vary. More demand for American goods, for example, would change the demand for the American dollar. Just like a regular demand curve for a normal good, the demand curve for individual currencies is downward sloping. If the value of a currency declines (it becomes cheaper), the quantity of that currency demanded by foreign consumers would increase, all else constant. The point at where the demand and supply curves intersect determines the market exchange rate. An increase in the demand for a currency creates a rightward shift of the demand curve, ultimately causing a rise in the exchange rate and increasing the value of the currency demanded.

Conversely, a fall in demand would shift the demand curve left and lead to a decline in the currency value. On the supply side, an increase in the supply of a currency will shift the supply curve to the right, ultimately creating a new intersection for supply and demand and a lower exchange rate for the currency. A decrease in the supply of a currency shifts the curve leftward, causing the exchange rate and the value of the currency to rise. When this lesson is done, you should be able to: Define the law of supply and the law of demand Describe the relationship between the demand for currency and the supply for currency Determine what may alter currency supply and demand. The Money Market: Money Supply and Money Demand Curves. An error occurred trying to load this video. Try refreshing the page, or contact customer support. You must create an account to continue watching. Register for a free trial. As a member, you'll also get unlimited access to over 70,000 lessons in math, English, science, history, and more. Plus, get practice tests, quizzes, and personalized coaching to help you succeed.

Already registered? Login here for access. You're on a roll. Keep up the good work! Just checking in. Are you still watching? 0:05 The Money Market 1:27 Money Demand Curve 2:03 Money Supply Curve 2:29 Equilibrium in the… 4:44 Lesson Summary. Want to watch this again later? Log in or sign up to add this lesson to a Custom Course. Recommended Lessons and Courses for You. Jon has taught Economics and Finance and has an MBA in Finance. When Margie earns an income, she always deposits her paycheck into a checking account at the bank. She chooses to keep some of her money in her checking account at all times, and she even keeps a little in the form of cash inside her purse. She also transfers some of this money to her savings account. This is what economists call the 'demand for money'. At the same time, although Margie may not realize it, the central bank is controlling how much money is available - what economists call the 'supply of money'.

When you look at both of these two perspectives together, we call it the money market. John Maynard Keynes developed the theory of liquidity preference, which says that the equilibrium 'price' of money is the interest rate where money supply intersects money demand. The money market is an economic model describing the supply and demand for money in a nation. Consumers and businesses have a demand for money, including cash and checking and savings accounts, and they use financial institutions for this purpose. Economists illustrate money demand using a demand curve, just like they do in the market for products and services. Money Demand and Money Supply Curves. The demand curve for money illustrates the quantity of money demanded at a given interest rate. Notice that the demand curve for money is downward sloping, which means that people want to hold less of their wealth in the form of money the higher that interest rates on bonds and other alternative investments are. The central bank controls the supply of money, and they interact with other financial institutions. This interaction is part of the money market, and we can illustrate it using a supply curve. The supply curve for money illustrates the quantity of money supplied at a given interest rate, and here's what that looks like. Notice that unlike a typical supply curve in the product market, the supply curve for money is vertical, because it does not depend on interest rates. It depends entirely on decisions made by the central bank. Equilibrium in the Money Market.

Equilibrium in the money market takes place when the quantity of money demanded is equal to the quantity supplied. Here's what this equilibrium looks like. Now that we have a model to work with, we can begin to visualize what happens when money demand increases or decreases, or when the money supply is increased or decreased by the Federal Reserve. Let's look first at an example of money demand changing and then see what happens when the supply of money changes instead. Suppose that the economy is doing very well, and real GDP increases this year by 5%. Margie is selling more cakes this year than last year. Everything is happy and prosperous in the land of Ceelo - and in towns across the nation. A higher economic output leads to higher incomes. The higher that income is, the more of their wealth people choose to hold in the form of money, so this leads to an increase in the demand for money. As you can see here, when money demand increases, the demand curve for money shifts to the right, which changes the equilibrium in the money market. What happens to the nominal interest rate? It rises, from r1 to r2. Get FREE access for 5 days, just create an account. No obligation, cancel anytime. Select a subject to preview related courses: On the other hand, if the economy experiences a recession, incomes could fall below their previous level from a previous year. A decrease in incomes throughout the economy would cause a leftward shift in the money demand curve, and result in a lower interest rate, from r1 to r2, as you can see here.

Because the quantity of money supplied affects the interest rate, and the central bank controls the supply, that means that they control nominal interest rates in the money market, which can have a powerful influence on many other things in the economy. So now you have a better understanding of what the money market is, what's going on inside of it, and why. It's time to review. The money market is an economic model describing the supply and demand for money in a nation. The demand curve for money illustrates the quantity of money demanded at a given interest rate. Notice that the demand curve for money is downward sloping, meaning that the higher the interest rates on bonds and other alternative investments are, the less money people choose to hold in the form of cash or checking accounts. The supply curve for money illustrates the quantity of money supplied at a given interest rate. Since the central bank controls the money supply, the supply curve for money is illustrated using a vertical line. Equilibrium in the money market takes place when the quantity of money demanded is equal to the quantity supplied. When money demand increases, the demand curve for money shifts to the right, which leads to a higher nominal interest rate. When money demand decreases, on the other hand, the demand curve for money shifts to the left, leading to a lower interest rate.

When the supply of money is increased by the central bank, the supply curve for money shifts to the right, leading to a lower interest rate. When the supply of money falls, the money supply curve shifts leftward, which leads to a higher interest rate. Once you complete this lesson you'll be able to: Describe the money market Explain the supply and demand curves for money Understand economic equilibrium Comprehend what happens when the supply of money increases or decreases. Shifting the AA-curve. The AA-curve depicts the relationship between changes in one exogenous variable and one endogenous variable within the asset market model. The exogenous variable changed is GNP. The endogenous variable affected is the exchange rate. At all points along the AA-curve it is assumed that all other exogenous variables remain fixed at their original values. The AA-curve will shift if there is a change in any of the other exogenous variables. We illustrate how this works in the adjoining diagram. Here we assume that the money supply in the economy falls from its initial level M S1 to a lower level M S2 . At the initial money supply, M S1 , and initial GNP levelY $ 1 , real money demand intersects real money supply at point G, determining the interest rate i $ 1 . This in turn determines the rate of return on US assets, RoR $ 1 , which intersects the foreign British RoR Ј at G in the upper diagram determining the equilibrium exchange rate E $Ј 1 . If the money supply, and all other exogenous variables remain fixed while GNP increases to Y $ 2 the equilibria shift to points H in the lower and upper diagrams determining exchange rate E $Ј 2 . This exercise plots out the initial AA-curve labeled AA| MS1 in the lower diagram connecting points G and H. Note, AA| MS1 is read as “the AA-curve given that M S = M S1 ." Now, suppose the money supply M S falls to M S2 . The reduction in M S leads to a reduction in the real money supply which, at GNP level Y $ 1 , shifts the money market equilibrium to point I determining a new interest rate i $ 3 . In the FOREX market the rate of return rises to RoR $ 3 which determines the equilibrium exchange rate E $Ј 3 . The equilibria at points I correspond to the combination (Y $ 1 , E $Ј 3 ), is transferred to point I on the lower diagram. This point lies on a new AA-curve because a second exogenous variable, namely M S , has changed. If we maintain the money supply at M S2 and change the GNP up to Y $ 2 the equilibrium will shift to point J (shown only on the lower diagram), plotting out a whole new AA-curve. This AA-curve is labeled A’A’| MS2 which means “the AA-curve given that M S = M S2 ”. The effect of a decrease in the money supply is to shift the AA-curve downward.

Indeed, a change in any exogenous variable in the asset markets that reduces the equilibrium exchange rate, with the exception of a change in GNP, will cause the AA-curve to shift down. Likewise, any change in an exogenous variable that causes an increase in the exchange rate will cause the AA-curve to shift up. A change in GNP will NOT shift AA because its effect is accounted for by the AA-curve itself. NB:Curveslines can shift only when a variable NOT plotted on the axis changes The following table presents a list of all variables that can shift the AA-curve upand down. The up-arrow indicates an increase in the variable, a down-arrow a decrease. Understanding the Supply and Demand Curve. The Supply and Demand Curve. The supply and demand curve is actually two curves in one. One represents supply, the other represents demand. Where they meet in the middle is known as the equilibrium point. It's at this point that analysts predict most of a commodity will sell at a given price. The supply and demand curve isn't perfect, it assumes that there is no waste or delays in supplying a given product at a given price. Shifts in Supply and Demand. Plotting the Supply and Demand Curve. Using the Supply and Demand Curve. Does supply spike with the season? For instance, with harvest-able crops like corn and wheat, there is a season where supply is high but demand is flat.

This causes a price decrease. Does demand vary from season to season? With gasoline, demand is highest during the summer travel season, so the price goes up. Although the supply and demand curve isn't a crystal ball, it can be very useful in analyzing a given commodity, or even a service. Being able to read supply and demand curves, then make an educated analysis of what you're looking at, is almost guaranteed to make you a better investor. What Happens to a Demand Curve During a Recession? The demand curve explains consumption patterns under various scenarios. JupiterimagesBrand X PicturesGetty Images. Every businessperson should be familiar with the the basic laws governing supply and demand, and there is no better place to start than the demand curve. This curve is a pictorial representation of the purchasing behavior of consumers and shows total purchase levels across a wide variety of price levels. Once you understand the basic demand curve, the next step is to grasp how the curve shifts and how you should respond to these shifts. Supply and Demand Basics. The basic laws of supply and demand dictate that if something is priced cheaper, consumers purchase, or demand, more of it. Suppliers, however, like higher prices and will produce a larger quantity if they can sell at a greater price. The supply and demand curves are graphic representations of these basic principles. When deriving these curves, economists plot prices on the vertical X axis and quantity on the horizontal Y-axis.

The demand curve is downward sloping, since higher prices are associated with lower demand levels. The supply curve is upward sloping, because a higher price means that manufacturers will produce and sell at a profit and will therefore produce larger quantities. The point at which the supply and demand curves intersect is referred to as the equilibrium point. Shifts in Demand Curve. The demand curve can shift due to a variety of reasons. Assume you own a pizzeria and sell 1,000 pizzas a week if you price them at $3.50 a slice. During Super Bowl season, people will likely buy more pizzas, even if your price stays the same. This means that the demand curve must have shifted right, since the same price of $3.50 is now corresponding to a quantity farther to the right along the graph. During a recession, people will buy less of practically all goods and services at the same price levels. Therefore, demand curves for most products will shift to the left during a recession.

Demand and Pricing Policy. A recession is associated with a decline in prices. This makes intuitive sense, but it can also be explained via the supply and demand curves. When people lose their jobs and cannot afford to pay as much, businesses must lower prices to keep sales up as much as possible. The supply and demand curves also attest to this, since a leftward shift in the demand curve will result in lower equilibrium price and demand levels, where supply and demand meet. Not all demand curves are hit equally hard during a recession, however. While diamond sales may drop dramatically, bread sales decline far less. How much a business should reduce its prices during a recession depends on the severity of the shift in the demand curve of its products. A few product categories actually enjoy higher sales during a recession; in other words, their demand curves shift to the right. Sales of products in dollar stores or thrift stores, for example, may increase during a recession. There are very few such product categories, however. If you are lucky enough to see an increase in demand for your products or services during a recession, you may be able to slightly raise prices. But you should be careful and consider the longer-term consequences of your pricing policy. A sharp hike in your sales price might not only make consumers feel exploited, but also invite new competitors who may enter the market with cheaper offerings.

Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School. Parallel shift in the yield curve. A shift in economic conditions in which the change in the interest rate on all maturities is the same number of basis points. In other words, if the three month T-bill increases 100 basis points (one %), then the 6-month, 1-year, 5-year, 10-year, 20-year, and 30-year rates all increase by 100 basis points as well. Related: Non-parallel shift in the yield curve. Investing Essentials. Financial Advisor Magazine.

Financial Advisor Magazine. Financial Advisor Magazine. Financial Advisor Magazine. Bank Investment Consultant. Bank Investment Consultant. Bank Investment Consultant. Bank Investment Consultant. Bank Investment Consultant. The mean of a random sample approaches the mean (expected value) of the population as sample size increases. Get the Term of the Day in your inbox! Find opportunities in the market using criteria based on 145 data elements.

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Please disable your ad blocker (or update your settings to ensure that javascript and cookies are enabled), so that we can continue to provide you with the first-rate market news and data you've come to expect from us. What is a 'Yield Curve' A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates. The most frequently reported yield curve compares the three-month, two-year, five-year and 30-year U. S. Treasury debt. This yield curve is used as a benchmark for other debt in the market, such as mortgage rates or bank lending rates, and it is also used to predict changes in economic output and growth. Inverted Yield Curve. BREAKING DOWN 'Yield Curve' The shape of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal, inverted and flat (or humped). A normal yield curve is one in which longer maturity bonds have a higher yield compared to shorter-term bonds due to the risks associated with time. An inverted yield curve is one in which the shorter-term yields are higher than the longer-term yields, which can be a sign of upcoming recession. In a flat or humped yield curve, the shorter - and longer-term yields are very close to each other, which is also a predictor of an economic transition.

A normal or up-sloped yield curve indicates yields on longer-term bonds may continue to rise, responding to periods of economic expansion. When investors expect longer-maturity bond yields to become even higher in the future, many would temporarily park their funds in shorter-term securities in hopes of purchasing longer-term bonds later for higher yields. In a rising interest rate environment, it is risky to have investments tied up in longer-term bonds when their value has yet to decline as a result of higher yields over time. The increasing temporary demand for shorter-term securities pushes their yields even lower, setting in motion a steeper up-sloped normal yield curve. Inverted Yield Curve. An inverted or down-sloped yield curve suggests yields on longer-term bonds may continue to fall, corresponding to periods of economic recession. When investors expect longer-maturity bond yields to become even lower in the future, many would purchase longer-maturity bonds to lock in yields before they decrease further. The increasing onset of demand for longer-maturity bonds and the lack of demand for shorter-term securities lead to higher prices but lower yields on longer-maturity bonds, and lower prices but higher yields on shorter-term securities, further inverting a down-sloped yield curve. A flat yield curve may arise from normal or inverted yield curve, depending on changing economic conditions.

When the economy is transitioning from expansion to slower development and even recession, yields on longer-maturity bonds tend to fall and yields on shorter-term securities likely rise, inverting a normal yield curve into a flat yield curve. When the economy is transitioning from recession to recovery and potential expansion, yields on longer-maturity bonds are set to rise and yields on shorter-maturity securities are sure to fall, tilting an inverted yield curve toward a flat yield curve. Economics Basics: Supply and Demand. Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand. The relationship between demand and supply underlie the forces behind the allocation of resources. In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

How? Let us take a closer look at the law of demand and the law of supply. A. The Law of Demand The law of demand states that, if all other factors remain equal, the higher the price of a good, the less people will demand that good. In other words, the higher the price, the lower the quantity demanded. The amount of a good that buyers purchase at a higher price is less because as the price of a good goes up, so does the opportunity cost of buying that good. As a result, people will naturally avoid buying a product that will force them to forgo the consumption of something else they value more. The chart below shows that the curve is a downward slope. A, B and C are points on the demand curve. Each point on the curve reflects a direct correlation between quantity demanded (Q) and price (P). So, at point A, the quantity demanded will be Q1 and the price will be P1, and so on. The demand relationship curve illustrates the negative relationship between price and quantity demanded. The higher the price of a good the lower the quantity demanded (A), and the lower the price, the more the good will be in demand (C). B. The Law of Supply Like the law of demand, the law of supply demonstrates the quantities that will be sold at a certain price.

But unlike the law of demand, the supply relationship shows an upward slope. This means that the higher the price, the higher the quantity supplied. Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue. A, B and C are points on the supply curve. Each point on the curve reflects a direct correlation between quantity supplied (Q) and price (P). At point B, the quantity supplied will be Q2 and the price will be P2, and so on. (To learn how economic factors are used in currency trading, read Forex Walkthrough: Economics .) Time and Supply Unlike the demand relationship, however, the supply relationship is a factor of time. Time is important to supply because suppliers must, but cannot always, react quickly to a change in demand or price. So it is important to try and determine whether a price change that is caused by demand will be temporary or permanent. Let's say there's a sudden increase in the demand and price for umbrellas in an unexpected rainy season; suppliers may simply accommodate demand by using their production equipment more intensively. If, however, there is a climate change, and the population will need umbrellas year-round, the change in demand and price will be expected to be long term; suppliers will have to change their equipment and production facilities in order to meet the long-term levels of demand. C. Supply and Demand Relationship Now that we know the laws of supply and demand, let's turn to an example to show how supply and demand affect price. Imagine that a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released because the opportunity cost is too high for suppliers to produce more.

If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied. If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand. In fact after the 20 consumers have been satisfied with their CD purchases, the price of the leftover CDs may drop as CD producers attempt to sell the remaining ten CDs. The lower price will then make the CD more available to people who had previously decided that the opportunity cost of buying the CD at $20 was too high. D. Equilibrium When supply and demand are equal (i. e. when the supply function and demand function intersect) the economy is said to be at equilibrium. At this point, the allocation of goods is at its most efficient because the amount of goods being supplied is exactly the same as the amount of goods being demanded. Thus, everyone (individuals, firms, or countries) is satisfied with the current economic condition. At the given price, suppliers are selling all the goods that they have produced and consumers are getting all the goods that they are demanding. As you can see on the chart, equilibrium occurs at the intersection of the demand and supply curve, which indicates no allocative inefficiency. At this point, the price of the goods will be P* and the quantity will be Q*. These figures are referred to as equilibrium price and quantity. In the real market place equilibrium can only ever be reached in theory, so the prices of goods and services are constantly changing in relation to fluctuations in demand and supply.

E. Disequilibrium. Disequilibrium occurs whenever the price or quantity is not equal to P* or Q*. 1. Excess Supply If the price is set too high, excess supply will be created within the economy and there will be allocative inefficiency. At price P1 the quantity of goods that the producers wish to supply is indicated by Q2. At P1, however, the quantity that the consumers want to consume is at Q1, a quantity much less than Q2. Because Q2 is greater than Q1, too much is being produced and too little is being consumed. The suppliers are trying to produce more goods, which they hope to sell to increase profits, but those consuming the goods will find the product less attractive and purchase less because the price is too high. 2. Excess Demand Excess demand is created when price is set below the equilibrium price. Because the price is so low, too many consumers want the good while producers are not making enough of it. In this situation, at price P1, the quantity of goods demanded by consumers at this price is Q2. Conversely, the quantity of goods that producers are willing to produce at this price is Q1. Thus, there are too few goods being produced to satisfy the wants (demand) of the consumers. However, as consumers have to compete with one other to buy the good at this price, the demand will push the price up, making suppliers want to supply more and bringing the price closer to its equilibrium. F. Shifts vs. Movement For economics, the "movements" and "shifts" in relation to the supply and demand curves represent very different market phenomena: 1. Movements A movement refers to a change along a curve. On the demand curve, a movement denotes a change in both price and quantity demanded from one point to another on the curve. The movement implies that the demand relationship remains consistent. Therefore, a movement along the demand curve will occur when the price of the good changes and the quantity demanded changes in accordance to the original demand relationship.

In other words, a movement occurs when a change in the quantity demanded is caused only by a change in price, and vice versa. Like a movement along the demand curve, a movement along the supply curve means that the supply relationship remains consistent. Therefore, a movement along the supply curve will occur when the price of the good changes and the quantity supplied changes in accordance to the original supply relationship. In other words, a movement occurs when a change in quantity supplied is caused only by a change in price, and vice versa. 2. Shifts A shift in a demand or supply curve occurs when a good's quantity demanded or supplied changes even though price remains the same. For instance, if the price for a bottle of beer was $2 and the quantity of beer demanded increased from Q1 to Q2, then there would be a shift in the demand for beer. Shifts in the demand curve imply that the original demand relationship has changed, meaning that quantity demand is affected by a factor other than price. A shift in the demand relationship would occur if, for instance, beer suddenly became the only type of alcohol available for consumption. Conversely, if the price for a bottle of beer was $2 and the quantity supplied decreased from Q1 to Q2, then there would be a shift in the supply of beer. Like a shift in the demand curve, a shift in the supply curve implies that the original supply curve has changed, meaning that the quantity supplied is effected by a factor other than price. A shift in the supply curve would occur if, for instance, a natural disaster caused a mass shortage of hops; beer manufacturers would be forced to supply less beer for the same price. To stay on top of the latest macroeconomic news and trends you can subscribe to our free daily News to Use newsletter.



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