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Exchange rates What influences them? What effect will they have on a business? Some ground work We want to show what happens to the amount of a good that people will demand when the price changes. Price Draw a set of axis labelled X=q Y=p Quantity THINK! If something is expensive, do you buy a small or large amount of it? THINK! As the price of this good falls, do you buy more or less of it? Draw a line on the axis's combining these two thoughts. Hopefully, you got something like this… Price DEMAND Quantity Things to remember… 1. Cost is how much it COSTS to make the good or service 2. Price is how much the firm sells it for. Linked to this is the important fact that cost does not change only price. (Look at how you labelled your y axis.) THINK! As the price rises can a firm make more or less profit on each item sold? KEEP THINKING! Therefore, will firms wish to make more or less of a good as the price rises? Draw a line showing your thoughts on a set of axis’s similar to those you put your demand curve on. Hopefully, you got something like this… Price Supply quantity Now lets put demand and supply together… Price Supply Demand quantity This is true for most things (but not all!). It is certainly how the price of currency is determined. If the supply or demand for that currency changes, then what will happen to the price (The exchange rate?) What will make S & D move? Volume of exports Why? Volume of imports Interest rates What are they? Government intervention Speculation