ECONOMICS

Elasticity of Demand Solution

Elasticity of Demand Solution

Question 1(A)

There can be different factors that might have affected the prices of gold to change. Given below are the factors which might have affected the gold prices:

1. Changes in exchange rate.

A decrease in the value of U.S. dollar exchange rate is usually encouraging the prices of gold in the world to increase. This is due to the investors which choose to exchange their dollars and purchase gold then with the expectation that gold might protect the value of money and may increase its worth. For instance, the value of dollar exchange rate continues to decrease against other currencies while the prices of gold continue to increase.

2. World political situation.

Due to changes that occur in the global economic scenario the prices of commodities tend to change, so does the prices of gold. For example there was an increase in gold price in the start of 2003 and at the end of 2002 occurred as an outcome of the attack to Iraq by the American Army. The participants of market shifted from money investment market and the share market to the gold investment market, which caused the prices of gold to jump sharply. 3. Supply and demand.

Supply and demand are the basic forces of any market. Which derives the prices to change, this is a major factor because when there is less supply and the demand is greater obviously the prices will tend to increase due to shortage of gold. While on the contrary, if there will be greater supply than demand then the prices of gold will tend to decrease due to less demand.

An example of demand and supply of gold is same like the event that occurred in the mid 80's. At that time, forward business sales by the mining companies were always blamed for raising the prices of gold. Although in terms of business, the actually behavior of mining companies is reasonable. The companies of gold mining could secure the output price when they make forward sales at an attractive price. Another example that we can cite here is the case that occurred in the mid of 1998 in which the prices of gold continued to decrease. At that moment the Central Banks in the European Union decided that they would bring down the gold reserves regarding the Euro currency implementation plan. Because of that the price of gold has been pushed just around USD 290 per troy ounce. 4. The global economic situation.

Economy is connected all over the world and it works with a chain effect. Because due to the change that takes place in one part of the globe does affect the economy to some extent at the other part of the world. An estimate is that about eight percent of the gold that is being supplied is used by the jewelry industry. Its consumption by jewelry industry plays a major role over the demand side. As the situation of the economy gets improved, the ...