Supply and demand: the mechanism behind the price
For the members of the Financial Market Club, FSJES
Every market price comes from the same picture. Buyers want less as the price rises. Sellers offer more as it rises. The price settles where the two quantities match.
Moving along a curve and moving the curve#
Students frequently mix these up. A change in the price moves you along a curve. A change in anything else shifts the curve itself. Mishkin keeps this straight with the Latin phrase ceteris paribus, other things being equal: you study one change at a time.
For bonds, Mishkin lists what shifts demand. The quantity demanded rises when wealth rises, when the expected return rises relative to other assets, and when liquidity rises. It falls when risk rises. Supply shifts for other reasons. A rise in expected inflation lowers the real cost of borrowing, so more bonds are supplied, while the same rise lowers the expected return on bonds relative to real assets, so less demand appears. Both curves shift, and the equilibrium bond price falls and the interest rate rises. This is the Fisher effect, seen through supply and demand.
Two Moroccan examples from Al Maliya#
Oil. Al Maliya says oil rose for the fourth month in a row in early 2016, linked to solid demand and lower output outside OPEC after supply disruptions in Nigeria and Kuwait. Demand held up while supply shrank, and the price went up.
Fish. In the first quarter of 2016, the volume of fish landed in Morocco rose 35%, but the value of the landings rose only 13.3%. A little arithmetic shows that the average value per unit must have fallen by about 16% (1.133 divided by 1.35 is roughly 0.84). More supply, lower unit price. One caution: the magazine does not state a price change, and a different mix of species could also explain the gap. So treat the 16% as an inference, not a reported figure.
Elasticity and market depth#
A crucial economic property determining how violently prices react to shifts in curves is price elasticity:
$$\epsilon = \frac{% \Delta Q}{% \Delta P}$$
In markets with high liquidity and deep order books, such as large-cap shares on the Casablanca exchange (e.g., Attijariwafa Bank or Maroc Telecom), demand elasticity is high. An order to sell 5,000 shares meets a dense pool of resting limit orders, so the clearing price moves only fractions of a percent.
In thinly traded small-cap equities on the Bourse de Casablanca, by contrast, demand is relatively inelastic over short trading intervals. When an institutional seller enters the market, the lack of immediate buyers forces prices to cascade downward through multiple tiers of the order book before finding equilibrium. Understanding elasticity explains why identical order sizes produce negligible ripples in blue chips but severe price dislocations in illiquid counters.
Why this matters for a market club#
Prices tell buyers and sellers where goods and money are wanted. When you see a price move, ask two questions: which curve shifted, and why?
In Morocco's financial markets, the same forces govern trading on the Bourse de Casablanca. When an institutional investor such as the Caisse de Depot et de Gestion (CDG) or an insurance company receives large premium inflows, their demand curve for liquid Moroccan equities shifts right, supporting valuations even when corporate earnings are flat. Conversely, when foreign investors repatriate capital, supply expands and prices adjust downward until domestic buyers step in.
For discussion#
- Al Maliya reports cement sales up 5.9% in the first quarter of 2016. Name one demand-side and one supply-side explanation. What data would separate them?
- Why can a bond's price fall while the issuer's willingness to pay stays the same?
- On the Casablanca exchange, if trading volume is light and a pension fund sells 50,000 shares of Attijariwafa Bank, does the resulting price drop represent a change in corporate fundamentals or a temporary shift in the market supply curve?
For the members of the Financial Market Club, FSJES. Moroccan figures describe 2015 and early 2016, so check current numbers before citing them.
Sources: Mishkin, The Economics of Money, Banking, and Financial Markets, 7th ed., chapter 5 (supply and demand in the bond market, Fisher effect). Al Maliya n°60, June 2016, section "Reperes" (oil prices, fish landings, cement sales). The fish price change is an inference from published volume and value figures.