![]() ![]() The equilibrium price is where the quantity demanded and the quantity supplied are equal. At the equilibrium, the interest rate (the “price” in this market) is 15% and the quantity of financial capital being loaned and borrowed is $600 billion. ![]() In this market for credit card borrowing, the demand curve (D) for borrowing financial capital intersects the supply curve (S) for lending financial capital at equilibrium €. Demand and Supply for Borrowing Money with Credit Cards. Table 5 shows the quantity of financial capital that consumers demand at various interest rates and the quantity that credit card firms (often banks) are willing to supply.įigure 1. The vertical or price axis shows the rate of return, which in the case of credit card borrowing can be measured with an interest rate. The horizontal axis of the financial market shows the quantity of money that is loaned or borrowed in this market. So, Americans pay tens of billions of dollars every year in interest on their credit cards-plus basic fees for the credit card or fees for late payments.įigure 1 illustrates demand and supply in the financial market for credit cards. Let’s say that, on average, the annual interest rate for credit card borrowing is 15% per year. In fact, in 2014, 56% of consumers carried an unpaid balance in the last 12 months. families with credit cards say that they “hardly ever” pay off the card in full. families with credit cards report that they almost always pay the full balance on time, but one-quarter of U.S. In 2014, Americans had about $793 billion outstanding in credit card debts. A typical credit card interest rate ranges from 12% to 18% per year. Credit cards allow you to borrow money from the card’s issuer, and pay back the borrowed amount plus interest, though most allow you a period of time in which you can repay the loan without paying interest. In 2014, almost 200 million Americans were cardholders. Let’s consider the market for borrowing money with credit cards. Similarly, if you demand a loan to buy a car or a computer, you will need to pay interest on the money you borrow. The interest paid to you as a percent of your deposits is the interest rate. For example, when you supply money into a savings account at a bank, you receive interest on your deposit. The simplest example of a rate of return is the interest rate. This rate of return can come in a variety of forms, depending on the type of investment. In financial markets, those who supply financial capital through saving expect to receive a rate of return, while those who demand financial capital by receiving funds expect to pay a rate of return. In any market, the price is what suppliers receive and what demanders pay. Who Demands and Who Supplies in Financial Markets? For a more detailed treatment of the different kinds of financial investments like bank accounts, stocks and bonds, see the Financial Markets chapter. Those who borrow money are on the demand side of the financial market. ![]() Those who save money (or make financial investments, which is the same thing), whether individuals or businesses, are on the supply side of the financial market. In this section, we will determine how the demand and supply model links those who wish to supply financial capital (i.e., savings) with those who demand financial capital (i.e., borrowing). Some firms reinvested their savings in their own businesses. Some was invested in private companies or loaned to government agencies that wanted to borrow money to raise funds for purposes like building roads or mass transit. Where did that savings go and what was it used for? Some of the savings ended up in banks, which in turn loaned the money to individuals or businesses that wanted to borrow money. United States’ households, institutions, and domestic businesses saved almost $1.9 trillion in 2013. Explain the role of price ceilings and usury laws in the U.S.debt in terms of domestic financial markets Explain how interest rates can affect supply and demand.Identify the demanders and suppliers in a financial market.All Rights Reserved.By the end of this section, you will be able to: All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2019 and/or its affiliates. Standard & Poor's and S&P are registered trademarks of Standard & Poor's Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. Factset: FactSet Research Systems Inc.2019. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes.
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