The Iowa Electronic Markets

Supply/Demand/Equilibriu
m
Teaching materials using the IEM
Prepared for the Fall 1999 IEM*IDEA/FIPSE Conference
By Thomas Gruca and Mark Pelzer
Last Edited March 2000

These materials were designed for use at the beginning of an undergraduate course in
Economics and are consistent with the typical text descriptions of these topics. The materials
help students understand the subject matter by engaging them in an actual market, the Iowa
Electronics Market. It assumes no previous experience with IEM markets.

Teaching Objectives
Supply-Demand-Equilibrium
Supply, Demand, Markets and Equilibrium
Students should understand:
1. Why different quantities are demanded at different prices
2. The effects of a change in price on the quantity demanded
3. Shifts in the demand curve
4. Why different quantities are supplied at different prices
5. The effects of a change in price on the quantity supplied
6. Shifts in the supply curve
7. The definition of a market as the union of buyers and sellers (demand and supply
curves)
8. Surpluses and the market reaction in prices and quantities
9. Shortages and the market reactions in prices and quantities
10. The definition of market equilibrium and its implication for changes in prices and
quantities
Students should be able to:
1. Construct a demand curve from raw data (Assignment 1)
2. Construct a supply curve from raw data (Assignment 3)
3. Graph a demand and supply curve on the same graph (Assignment 5)
4. Identify the market price and quantity demanded/supplied (Assignment 5)

Apply Supply and Demand Analysis to the Market for an Intangible

Good
Students should:
1. Be able to provide examples of intangible goods

2. Understand the nature of contracts as promises exchanged for money

3. Be able to define a futures contract with respect to IEM contracts
4. Understand why suppliers may charge different prices for the same intangible good
5. Understand the relationship between offers to buy (bid prices) and the demand curve
for an intangible good
6. Understand the relationship between offers to sell (ask prices) and the supply curve
for an intangible good
7. Understand the relationship between the equilibrium price and last trade price on the
IEM
8. Understand the meaning of best bid and the demand curve for IEM contracts
9. Understand the meaning of best ask and the supply curve for IEM contracts
10. Be able to define limit orders (bids and asks)
Students should be able to:
1. Use IEM data to construct a demand curve (Assignment 2)
2. Use IEM data to construct a supply curve (Assignment 4)
3. Use IEM data to construct a market and determine equilibrium price and quantity sold
(Assignment 6)
4. Use their knowledge of supply and demand to interpret the impact of information of prices in IEM
markets (Assignment 7)

Important Aspects of the Assignments

Students first use a simplified data set to construct a demand curve, supply curve and a market

Students then apply these same skills to a large set of real data from the IEM

Available Materials
1. Lecture Outline
2. Student Assignments using atomistic demand and supply data
3. Student Assignment s using IEM data
Excel spreadsheet including IEM data (and instructor
solutions)
4. Examination Questions
5. Power Point Slides (with lecture notes attached)

Lecture Outline
Supply-Demand-Equilibrium
1. Definition of Demand
2. Demand curve
a. Shifts along the demand curve due to changes in prices
3. Shifts in the Demand Curve
a. Income
b. Related goods
c. Tastes
d. Number of consumers
e. Expectations of future prices
4. Demand for an Intangible Good
a. Example, promise exchanged for money
b. Applications: loans, insurance
c. Futures contract examples
d. Political futures contracts (IEM)
5. Definition of Supply
6. Supply Curve
a. Shifts along the supply curve due to changes in prices
7. Shifts in the Supply Curve
a. Price of relevant resources
b. Technology
c. Taxes

d. Number of sellers
e. Expectations of future prices
8. Supply for an intangible good
a. Insurance example
b. Variations in expectations of future events
c. Political futures contracts (IEM)
9. Market Definition
a. Graph of demand and supply curves
10. Market adjustments to Surplus and Shortage
a. Government interventions
11. Equilibrium
a. Definition
b. Identifying price and quantity demanded/supplied
12. Supply and Demand Information in Real Markets
a. Completed exchanges
b. Market price
c. Offers to sell (ask price)
d. Offers to buy (bid price)
e. Definitions of best bid, best ask and last trade (IEM)
13. IEM
a. Description
b. Screen capture
c. Information available to traders
d. Obtaining contracts to sell
Making money in the IEM