Copyright © 2012 Pearson Prentice Hall. All rights reserved. CHAPTER 4 Web Appendix 2 Applying the Asset Market Approach to a Commodity Market: The Case of Gold

© 2012 Pearson Prentice Hall. All rights reserved. Web Appendix 4-1 Supply and Demand in Gold Market Deriving Demand Curve P e t+1 is held constant P t, g e, R e G d Demand curve is downward sloping Deriving Supply Curve P t, more production, G s Supply curve is upward sloping

© 2012 Pearson Prentice Hall. All rights reserved. Web Appendix 4-2 Supply and Demand in Gold Market Market Equilibrium 1. G d = G s 2. If P t > P* = P 1, G s > G d, P t to P* 3. If P t < P* = P 1, G s < G d, P t to P*

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

© 2012 Pearson Prentice Hall. All rights reserved. Web Appendix 4-4 Response of Gold Market to a Change in e If e 1. e, P e t+1 ; at given P t, g e G d G d shifts right 2.Go to point 2; P t 3.Price of gold positively related to e 4.Gold price is barometer of - pressure