Transcript Chap4.2

Chapter 4
Appendix 2
Applying the
Asset Market
Approach to a
Commodity
Market: The
Case of Gold
Supply and Demand in
Gold Market
• Deriving Demand Curve
─ Pet+1 is held constant
─ Pt , ge , Re   Gd 
─ Demand curve is downward sloping
• Deriving Supply Curve
─ Pt , more production, Gs 
─ Supply curve is upward sloping
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Supply and Demand in
Gold Market
• Market Equilibrium
1. Gd = Gs
2. If Pt > P* = P1, Gs > Gd, Pt  to P*
3. If Pt < P* = P1, Gs < Gd, Pt  to P*
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4-2
Changes in Equilibrium
• Factors That Shift Demand Curve for Gold
1.Wealth
2.Expected return on gold relative to alternative
assets
3.Riskiness of gold relative to alternative assets
4.Liquidity of gold relative to alternative assets
• Factors That Shift Supply Curve for Gold
1.Technology of mining
2.Government sales of gold
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Case: Change in Price of Gold
From a Rise in Expected Inflation
• If exp. Infl. (pe) 
Figure 1 A Change in the
Equilibrium Price of Gold
1. pe , Pet+1 ; at given Pt,
ge  
Gd   Gd shifts right
2. Go to point 2; Pt 
3. Price of gold positively
related
to pe
4. Gold price is barometer
of
p- pressure
Copyright ©2015 Pearson Education, Inc. All rights reserved.
4-4
Example
• Factors That Shift Demand Curve for Gold
1. Wealth
2. Expected return on gold relative to alternative
assets
3. Riskiness of gold relative to alternative assets
4. Liquidity of gold relative to alternative assets
• Factors That Shift Supply Curve for Gold
1. Technology of mining
2. Government sales of gold
Copyright ©2015 Pearson Education, Inc. All rights reserved.
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