PRINCIPLE OF ECONOMICS
NAME: MUHAMMAD AMIRUL SYAFIQ BIN KHAIRUDDIN
MATRIX NO: 21367
PROGRAM: INFORMATION AND COMMUNICATION
Gold is chemical element with a symbol Au and relative atomic mass of 79 in
periodic table. It is a valuable and precious sought material for jewelry, industry and
coins. Gold also has varieties of symbolism in every group of person such as
richness, royalty and greatness.
However, the rate of the price can also be fluctuated according to the
condition. Both short-run and long-run must concern with the volatility of the gold.
Gold volatility is shaped through demand and supply in market. The factor
determinants the demand and supply are the production of gold by gold mines,
central banks, investors and the industry. Thinking to predict the price of the gold is
plainly wrong because there are many factors other than demand and supply that
can affect the price such as natural disaster and discovery of new gold deposit.
As other metals, gold’s weight is calculated with troy and when the gold has
been alloyed carat must be used to show the quantity of gold present in the alloy.
History has shown that gold has been used to support the monetary in a system
called “gold specie” standard where one unit of money will equivalent to some
amount of gold. In this system, central bank tried to control the price of gold with the
value of money that people want to exchange.
EXAMINING THE GOLD MARKET
Figure 1.1 Gold market graph analysis
For a long time gold value has been put by United States of America at
$20.67/oz, however in the year 1934 the value has been fixed at price $35.00/oz. At
17th Mac 1968, gold crisis has occurred so two level of scheme pricing was
introduced which gold can be used to manage international account with old gold
price that is $35.00/oz. Even though, gold price in individual market was allowed to
fluctuate. In 1975, the two levels were totally omitted when gold price has been
allowed to fluctuate. Since 1968, gold price in open market has fluctuated
tremendously with the highest record $1975.22/oz at 21st January 1980 until the
lowest record $348.2/oz at April 2001. The gold price has increase to $500/oz at the
end of year 2005 because of decreasing value of American dollar and inflation
affected by increasing of energy cost.
Assume there is a more efficient technology to extract gold from
gold bearing ores. Illustrate with demand and supply curves and
explain its impact on the gold market.
Figure 1.2 Change in supply curve on gold market
In Figure 1.2, supply of gold in market become increase as there are more
technological advancement in gold extraction. The resulted will conducted supply
curve shift to the right where the initial supply curve is S0. At initial price of RM600,
there is surplus. The surplus makes the price decreasing to RM500. The quantity of
gold demand will rise as the price fall. The new supply curve, S1, intersect with
demand curve, DD, at RM500. The intersect point show the equilibrium price of S1 is
RM500 and the equilibrium quantity rise from 400 to 500.
Assume there is an increase in the demand for gold jewellery. Draw
graphs to illustrate its impact on the gold market. Explain.
Figure 1.3 Change in demand curve for gold market
Increase in demand for gold jewelleries will increase the demand for gold as it is
derived demand. The result of demand curve is the curve shifts to the right. There is
shortage occur in initial price which RM600. Then, the price rises and quantity of supply will
increase to avoid shortage. The new demand curve, D1, is intersecting with supply curve,
SS, at a price of RM800. The intersection shows the equilibrium of price and the equilibrium
of quantity. The result equilibrium price will increase from RM600 to RM800 and the
equilibrium quantity will increase from 500 to700.