Demand, Supply and Market Equilibrium

Demand, Supply and Market Equilibrium

Introduction

In the middle of drastic crisis in Asian Financial market. Banks in Taiwan faced worst credit situation and went through one of the worst recession in history of finance. At that time, they did not know the reason behind such crisis. However, the assumption was that the primary goal of such economic crisis is a distinct gap between supply and demand of bank loans. After implication of simple statistical and economical methods, researcher found that a significant fall on the supply side is mainly responsible for such economic crisis. Hence this essay we will discuss the effects of demand and supply in credit growth.

Methodology

Econometric models were used to examine whether this disturbance in Market equilibrium of credit loans was initiated from the supply or demand side. As far as the need of loans was concerned, banks may cut back their investment due to the negative outlook on the economy than business of bank loans will automatically decline. Poorer guarantee principles, reduction in earnings and debt overhangs may appear as a consequence for a strange slowdown in demand of bank loans. Similarly from the supply side a change is only possible if the potential of a bank to extend loans is damaged during the economic crisis. When a borrower stops payment of his loans it becomes difficult for banks to survive due to constraints in lending capacity of a bank. Shift in supply specifically damages those firms that are dependent on a bank. In such circumstances, it becomes a trouble for a firm to replace credit of a bank with other funds (Chen, 2008).

Two complementary econometrics models were used to measure the level of increasing demand in the market for this purpose an aggregate data is used as the measure of tension in credit. An increase in demand can occur due to various reasons. If the supply of loans is not perfectly elastic, then interest rates may not regulate rapidly. Similarly, if the bank does not raise their interest rates on the loans it will result into excess demand for their loans.

Demand and supply on Taiwan's Credit market

This fall in credits of Taiwan Banks was primarily caused when market equilibrium is disturbed by the shift from supply or demand side. Company will show excess demand if it appeared from the supply side. Similarly, if this crisis arose from the business then surplus ...