Copyright (c) B.Achutha 1992 - 2000 Malaysia

Money Supply

The area under the curve, is the total amount of money available in this particular market. This is money supply as this is the money being released into the market from this population sample size.

Money Supply, Ms1 <=> P1$1 + P2$2 + .... + Pn$n

where P1,P2,...Pn is the number of people that can afford prices $1,$2,...$n and 1 to n is the general number of categories or segments of prices. (due to difficulty of drawing opposite arrows sign a <=> is used here) You will notice that I did not use an equal sign'=' as this is not an assignment but more of a state of equilibrium where functions on either side can affect the behaviour of the other.

Therefore in an economy the consumer market can be broken down into several senments with their own money supply or money circulation. Summing up all these will provide us with the total money is circulation within the consumer market.

When the money supply shrinks either prices must come down or volume traded drops - remember the number of buyers entering the market is given by Pi ( P1,...Pi....Pn). And there will be cases where both prices come down and trading volumes drop to establish a new level of activity.

If the money supply goes up then either prices go up or volume of trade goes up or both to establish a new equilibrium level.

Factories and business cannot operate without a minimal level of volume traded hence when money supply is shrinking it is important to lower prices in order to maintain a minimal amout of transactions to keep factories and business viable.

There are other factors that affect the money supply. If you are purchasing an item with cash in hand, the transaction may be on impulse of planned due to need of to replinsh a consumable. Hence, advertising ans promotion and living affect prices and volume traded. These are directly affected by the size of your pay packet with respect to the cost of living.  But if you need to purchase more expensive goods such as a house or a car, the price of the item is determined by the monthly installments needed to be forked out, this is the perceived price. Hence, the perceived price is also indeirectly determined by the availability of cheap loans and interest rates.  As interest rates go up the perceived prices increase, even though the price of the car of house has not changed. Therefore in such markets interest rates do affect money supply.

Down payments act as a barrier to entry into the markets, as would be consumers who do not have sufficient down payments cannot enter the market even if they can afford the perceived price. Other barriers to entry are fees such as legal, processing, insurance....etc

If a major part of the money in circulation in a country is drained out of an economy, wouldn't that affect the money supply and hence trading acitivity? I do hope the reader will understand why Capital & Exchange controls were necessary.