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Monday, September 29, 2008

If price increases, does quantity demanded decrease?

Economists tend to think so. But what if that which is being demanded is actually needed to cover payroll, etc? What then?

From Financial Week:

From the story:
The rise in commercial paper costs reflects a growing lack of confidence in short-term credit markets, as investors pulled a record amount of cash—$182 billion—out of money-market funds in the two weeks ended Sept. 24, after the first shareholder losses in 14 years.

Money funds are the biggest buyers of commercial paper, which typically helps companies cover day-to-day expenses such as payroll and rent. Some companies are already scrambling. Goodyear Tire & Rubber said it plans to draw $600 million from its U.S. revolving credit facility due to what it termed "a temporary delay" in its ability to access $360 million in cash currently invested with the Reserve Primary Fund.

If firms don't get short-term funding, they may not make payroll. People who aren't paid for the work they have done, get really ticked off. People who are really ticked off usually don't make wise decisions.

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