short essay

Submitted By cowgirls2
Words: 628
Pages: 3

The demand and supply of loanable funds is where the different types of capital take place in capital markets. Demand and supply for loanable funds comes from those who want to save and those who want to borrow. Demand for loanable funds comes from the demand for funds from households and businesses who wish to borrow to make investments. Supply for loanable funds comes from those who have extra money to save or lend out. The use of the model of demand and supply is the most important tool of economic analysis; shows how markets work. The demand side of a market is consumers which buy products from firms. The supply side is firms which sell their products to consumers. To further break it done, will be the question of what is loanable funds? Loanable funds can be described as funds that are available for borrowing. Basically, loanable funds consist of household savings and/or bank loans and demand for loanable funds comes from households and businesses who want to borrow to make investments. With the term described above and economists using a model of supply and demand to help with understanding economics brings in the question of what is a loanable funds model. The structure of the loanable funds model is a comparative-statics equilibrium model that employs a supply and demand curve to locate a market-clearing equilibrium price (Evans, 1999, p.1). The model below uses the cost of credit - the interest rate, represented by the variable r. The simple version of the loanable funds model simplifies the complexity by assuming only one "interest rate", which can be thought of a proxy average for the entire structure of interest rates (Evans, 1999, p. 1). This model is using a demand curve which represents the demand for credit by borrowers and the supply curve which represents the supply of credit by lenders.

The demand curve includes consumer borrowers (credit cards, auto loans, home mortgages, installment credit, etc.), businesses of all kinds (corporate borrowing, farm credit, trade credit, etc.) and government uses of credit for all purposes (Evans, 1999, p. 2). Banking can create loanable funds only if its receipts are in excess of its expenditures on good and services. The supply of loanable funds in a region or a nation is dependent on the money supply within its boundaries (Moore, & Hill, 2001, p. 500). Loanable funds come from other areas besides the local economy which may be available to households or firms in the area. Individuals can borrow from insurance…