Price Elasticity of Gold

Topics: Supply and demand, Price elasticity of demand, Luxury good Pages: 3 (852 words) Published: February 22, 2013
Price Elasticity of Gold
Group name: In-Demand
The general inverse relationship between price and demand is a key fundamental in economics. A rise in price is known to shrink demand and vice versa. However, another important factor in economics is the price elasticity of demand, which can be interpreted as the percentage change in demand relative to the percentage change in price. Basic goods tend to be of low elasticity, thus the change in price has little effect on demand, while luxury goods are usually of high elasticity where demand varies greatly opposing a slight change in prices.

In our analysis of the worldwide demand for gold over the past 3 years, the trend shows that a decrease in price leads to a decrease in the demand for gold and vice-versa. This shows that consumers are willing to pay a higher price for gold than a lower one.

The below data and graph depicts the price-demand relation of gold over the past 3 years: Quarter – Year| Quantity demanded (in thousand tons)| Price ($US bn)| Price Elasticity | Q1 – 08| 13.4| 450| -|

Q2 – 08| 15| 521| 0.76|
Q3 – 08| 18.8| 672| 0.87|
Q4 – 08| 14| 548| 1.38|
Q1 – 09| 9.6| 329| 0.79|
Q2 – 09| 12.8| 431| 1.08|
Q3 – 09| 15.1| 490| 1.31|
Q4 – 09| 18.1| 511| 4.64|
Q1 – 10| 18.6| 521| 1.41|
Q2 – 10| 16.3| 422| 0.65|
Q3 – 10| 21.3| 541| 1.09|
Q4 – 10| 25.3| 575| 2.99|

Price Elasticity: ΔQuantity DemandedΔPrice X Initial PriceInitial Quantity

Demand curve of gold from 2008 – 2010 per quarter

Price Elasticity of gold from 2008-2010
Gold, being a luxury product wherein the price elasticity is high i.e. an increase / decrease in price leads to a high change in demand. A couple of factors affecting the high elasticity of gold are: * The snob effect: preference for goods because they are different from those commonly preferred; in other words, for consumers who want to use exclusive products, price is quality...
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