# Elasticity of price

CHAPTER 1

### INTRODUCTION

Need: To study the elasticity of price of the gold using the time series from 1970 to 2010.

Scope:

Methodology: time series analysis of the price of the gold and the dollar index.

Limitation:

Elasticityis quantity of the ratio of thepercent changeof one variable to the percent change in another variable. Different types of elasticities are elasticity of supply, elasticity of demand, elasticity of scale, output elasticities, and non-traditional elasticities. A brief description of the elasticities and a detailed description of price elasticity of supply & demand.

We will be going through how the gold price has increasing since the early 70's. Even the growth of World GDP and the US dollar index is kept on fluctuating. The price of the gold is increased 2,240 for every year since the early 70's where as the World Gross Domestic Product has increased 1,556. The value of the gold has gone down during the world war and in the in the late 90's due to the excess supply in the United Kingdom the gold price has gone down and due to the change in the price the total stocks of the gold has sold out in a matter of hours.

CHAPTER 2 SPECIFIC ELASTICITIES

Elasticityis quantity of the ratio of thepercent changeof one variable to the percent change in another variable. Different types of elasticities are elasticity of supply, elasticity of demand, elasticity of scale, output elasticities, and non-traditional elasticities.

Elasticities of Demand:

Price elasticity of demand calculates the magnitude of demand curve where as others calculates the shift in the demand curve. The following pages will give you a brief description of different types of elasticities of demand and supply.

Price elasticity of demand:

Price elasticity of demand is amount of change in the quantity demanded for one percentage increase or decrease in the price. Increase or decrease in the price affects the demand curve and shifts the demand curve. Mathematically it is (?Q/?P) (P/Q), where Q is the quantity demanded, P is the price, ?Q is change in quantity demanded, and ?P is change in price. Price elasticity of demand is almost always negative.

Income elasticity of demand:

Income elasticity of demand is amount of change in the quantity demanded for one percent increase or decrease in the income. Increase or decrease in the income shifts the demand curve. Mathematically income elasticity of demand is (?Q/?Y) (Y/Q), where Q is the quantity demanded, y is the income, ?Q is change in quantity demanded, and ?y is change in income. If Income elasticity of demand < 1it is inelastic demand. If Income elasticity of demand > 1 it is elastic demand.

Cost price elasticity of demand:

Cross price elasticity of demand is amount of change in the quantity demand for a particular good for one percent increase or decrease in the price of that good. Change in the price affects the demand curve and shifts the demand curve. Mathematically cost price elasticity of demand is (?Q/?Prg) (Prg/Q), where Q is the quantity demanded, Prg is the price of the good, ?Q is change in quantity demanded, and ?Prg is change in the price. Change in the price of the other goods also may affect the demand curve some times.

Advertising elasticity of demand is to calculate the change in the quantity demand of a decrease or increase of advertising on the market. Mathematically advertising elasticity of demand is (?Q/?A) (A/Q), where Q is the quantity demanded, A is the spending on advertising, ?Q is change in quantity demanded, and ?A is change in the spending on advertising. Advertising elasticity of demand is mostly positive.

Cross elasticity of demand between firms:

Cross elasticity of demand between firms is the change in the demand curve when other firms or competitors change the price of their goods or advertise more when compared to us.

Elasticities of Supply:

Price elasticity of supply:

Price elasticity of supply is the amount of the quantity supplied to one percentage of the change in the price. Mathematically it is (?Q/?P) (P/Q), where Q is the quantity supplied, P is the price of the good, ?Q is change in quantity supplied, and ?P is change in the price. It is always positive or 0. It is 0 the quantity of the good demanded is equal to the quantity of the good supplied, else if the price elasticity of supply is less than zero then the quantity of the good demanded is greater than the quantity of the good supplied. Availability of raw materials, length and complexity of production, time to respond, excess capacity, and inventories may affect the price elasticity of supply.

Elasticities of Scale:

Elasticities of scale is almost same as output elasticities. Elasticities of scale calculate the percentage change in the output to the percentage increase or decrease in the input of the goods which is affected by the increase or decrease of production scale. Elasticities of scale calculate the percentage change of the output for the entire production, but output elasticity calculates the percentage change of the output for every good.

Output Elasticities:

Output elasticities is same as elasticities of scale, where as elasticities of scale calculates the percentage change of the output for the entire production where as output elasticity calculate the percentage change of the output for every good. Output elasticity is to calculate the percentage change in the output to the percentage increase or decrease in the input of the good which is affected by the increase or decrease of production of a good. Mathematically cost price elasticity of demand is (?Q/?I) (I/Q), where Q is the output, I is the input, ?Q is change in output, and ?P is change in the input.

Non-traditional elasticities depend on the variables which are functionally related to the demand of a good for different reasons. For example, most of the people watch cricket when there is a live match only and swine flu tablets gets sold if there is a swine attack in the country.

Elasticity and Slope:

Elasticity and the slope are not the same but with some exceptions they can be related to each other. Figure 2.1 shows you three graphs among them first two are the demand curves and the last one is the supply graph. The first demand curve is elastic demand curve and the second graph is inelastic demand curve. The supply curve is passing through the origin with the unit elasticity.

CHAPTER 3

PRICE ELASTICITY OF DEMAND

Price elasticity of demand is amount of change in the quantity demanded for one percentage increase or decrease in the price. Increase or decrease in the price affects the demand curve and shifts the demand curve. Mathematically it is (?Q/?P) (P/Q), where Q is the quantity demanded, P is the price, ?Q is change in quantity demanded, and ?P is change in price. Price elasticity of demand is almost always negative.

The above figure gives you a brief discretion of the demand curve. The price elasticity of demand curve is derived from the percentage change in the quantity which is on the X-axis and the percentage change in the price which is on the y-axis.

Definition:

Mathematically if x (p,w) is the demand for the goods x1, x2, x3,........, xl where price and wealth as parameters, and xl (p,w) is the demand for the good\displaystyle l, Then the elasticity of demand xl (p,w) with respect to the pricepkis

Point-price elasticities:

Price elasticity of demand is not-constant, it is an non-linear curve in order to find out the point price elasticity we have to minimize the start and end point of the prices and consider a point to calculate the elasticity.

Arc elasticities:

To make it more accurate we can take two points and take the average for the two points for the provided two points. Price elasticity of demand will be (P1+P2/Q1+Q2) (?Q/?P), where P1 and P2 are prices at two different points and Q1+Q2 are quantities at two different points.

Determinants:

Substitute goods: Price elasticity of demand curve depends on the cost of the substitute goods. If the cost of the substitute goods less than the good which we are offering they will go for it. Similarly if the cost of the substitute goods more than the good which we are offering they will not choose another product.

Percentage of income: Price elasticity of demand curve also depends on the cost of the product. Some people buy the product depending on the cost of the product also.

Necessity: Price elasticity of demand curve also depends on the necessity of the product. For example, in a rainy season no matter what the cost of the product they will buy an umbrella.

Duration: Price elasticity of demand curve also depends on the duration of the change in price of the product. If the gold rate reduces most of the people will try to buy gold, but when it is high they will try not to buy it.

Brand loyalty: Price elasticity of demand curve also depends on the brand of the company. If a product is attached to a product brand then the elasticity may shift.

CHAPTER 4

### PRICE ELASTICITY OF SUPPLY

Price elasticity of supply is the amount of the quantity supplied to one percentage of the change in the price. Mathematically it is (?Q/?P) (P/Q), where Q is the quantity supplied, P is the price of the good, ?Q is change in quantity supplied, and ?P is change in the price. It is always positive or 0. It is 0 the quantity of the good demanded is equal to the quantity of the good supplied, else if the price elasticity of supply is less than zero then the quantity of the good demanded is greater than the quantity of the good supplied. Availability of raw materials, length and complexity of production, time to respond, excess capacity, and inventories may affect the price elasticity of supply.

Determinants:

Availability of raw materials: Price elasticity of supply curve depends on the availability of the raw materials. If the price of the gold is low and u don't have as enough then the supply curve shifts.

Length and complexity of production: Price elasticity of supply curve also depends on the length and the complexity of the production. If it takes more time to produce and it needs trained labor then the supply curve shifts.

Time to respond: Price elasticity of supply curve also depends on the time which you take to respond to the market. If you do not have enough labor or the materials to produce the product then the supply curve shifts.

Inventories: Price elasticity of supply curve also depends on goods you have in the inventories. If you have enough goods in the inventory you can increase the supply in the market.

CHAPTER 5

Figure 5.1 shows you the supply and the demand curve with the quantity of the product on the x-axis and the price on the y-axis. Demand curve is the red and the supply curve is the blue one and the point at which they both meet is the equilibrium.

Equilibrium:

If the amount of the quantity demanded in the market is same as amount of quantity supply then it is called as equilibrium. The point at which the supply and the demand curve meets is called equilibrium.

Change in equilibrium:

Equilibrium shifts when the demand curve shifts to the left or right or if the supply curve shifts to the left or right.

The above table shows you the comparison between the price of the gold, world GDP, and trade weighted US dollar index. It also states the percentage change in the price of gold, world GDP, and trade weighted US dollar index since the late 60's. The net percentage of the change in the price of the gold and the world GDP is calculated. Net change in the price of the gold is 2,238, where as the net change in the world GDP is just 1,555. The net change in the price of gold is very high when compared to the world GDP since the late 60's.

Factors influencing the gold price:

The factors that influencing the price of the gold are banks, Low or negative real interest rates, War, invasion, looting, crisis.

Investment Strategies:

Most of the people use gold as an investment. The price of the gold is keep on increasing since the early 70's that is the mail reason most of the people are investing on gold. The net change in the price of gold is very high when compared to the world GDP since the late 60's. Even when we compare the net change in the price of gold with the stocks the price of gold is very consistent.

Surrogate index is used in the above graph to calculate the ratio of the stocks and the price of the gold since the early 60's and till now. In 1990 the ratio of the stocks and the price of the gold are very low. Most of the investors invested on the gold after the world wars because the price of the gold reduced a lot because of the recession in the Middle East and the United States.

CHAPTER 7

### Conclusion:

Since the early 70's the price of the gold is constantly increasing till now. Even the growth of the World Gross GDP and the US dollar index is keep on fluctuating. The price of the gold is increased 2.240 for every year since the early 70's where as the World Gross Domestic Product has increased 1.556. The value of the gold has gone down during the world war and in the in the late 90's due to the excess supply in the United Kingdom the gold price has gone down and due to the change in the price the total stocks of the gold has sold out in a matter of hours. It can be extended to identify other reasons for the rise of the gold price and also can be related to oil prices.

### REFERENCES

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