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CHAPTER 4Web

Appendix 2

Applying the Asset Market Approach to a Commodity

Market: The Case of Gold

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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

© 2012 Pearson Prentice Hall. All rights reserved. Web Appendix 4-3

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*

© 2012 Pearson Prentice Hall. All rights reserved. Web Appendix 4-4

Changes in Equilibrium

Factors That Shift Demand Curve for Gold1. 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 Gold1. Technology of mining

2. Government sales of gold

© 2012 Pearson Prentice Hall. All rights reserved. Web Appendix 4-5

Response of Gold Market to a Change in e

If e 1. e , Pe

t+1 ; at given Pt, ge Gd Gd shifts right

─ Go to point 2; Pt

─ Price of gold positively related to e

─ Gold price is barometer of - pressure