Question 2

It has been quite some time since you studied economic principles and you aren't quite sure if you remember the interactions between the principles of Supply, Demand and Elasticity. You remember learning that when Supply and Demand curves are drawn, it is assumed that other factors which affect Supply and Demand do not change.

In order to evaluate your own work and your understanding of these important economic principles, you offer to work with a colleague in the investments team who has been given the task of looking at how the Supply and Demand curves do change when there are other factors that change.

The Reserve Bank of Australia (RBA) has shown that recently the 4 major banks have increased the proportion of assets allocated to home mortgage loans. The issue that you are assisting with is determining if this is likely to increase or decrease the returns from banking shares.

Specifically, the returns on banking shares will be affected by the volume of home mortgage loans and you need to determine what the impact will be.

To check your knowledge, you start with the basic Supply and Demand curves for any goods/services. You recall that the Demand curve describes the actions of buyers/consumers whereas the Supply curve describes the actions of sellers/producers.

To ensure you do know how these principles operate, you use the market in Home Loan Mortgages as shown in the diagram below to check your knowledge:

1. On the diagram, clearly label (in the boxes provided):

• The Supply Curve
• The Demand Curve
• The equilibrium price "P"
• The equilibrium quantity "Q"
• The equilibrium point "E"
• Label the axes