Decreasing the price, increases the demand! Is it true in the case of GOLD?

Concept of Price elasticity:

It is a relationship between change in quantity demanded and change in its price. In economics, it is also termed as price sensitivity.

Price elasticity of demand= % Change in quantity demanded/ % Change in price

If the quantity demanded for a good increases 20% and there is  10% decrease in price, the price elasticity of demand would be 20 %/ 10% = 2.

Elastic demand: Small change in price leads to big change in quantity demanded. It is a situation where the people will stop buying the product or greatly reduce its demand when the price increases. Examples: They are luxurious goods. In case of jewellery, people will reduce its demand when price rises.

Inelastic demand: When there is a big change in price which leads to small change in quantity demanded. Examples: They are non-luxurious goods. In case of milk, water, people will buy these products even if their price increases.

How it helps Companies?

Inelastic demand tells that when a company increases price, its revenue will decrease.

Elastic demand tells that the decrease in price of product will attract revenue.

DEMAND OF GOLD IN THE RECENT YEARS:

According to the recent news, Hindustan Times, Mumbai, India, 22 April, Gold prices fell by Rupees 100. This decrease in the price of Gold lead to the 15% increase in sales with some jewellers but the sales were not strong enough. The reasons could be many. Let it be the dollar strengthening or the interest rates rising in the U.S. Investors are unlikely to invest in gold due to the rising rates in the U.S. Also, the severe damage to crops in India distract gold demand from rural families. Thus, investment in gold has weaken these days in India.

gold

There are a lot of products or things around us that let us know if there demand is elastic or inelastic. Let’s talk about some examples of elastic demand and inelastic demand and also if there are any exceptions.

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20 thoughts on “Decreasing the price, increases the demand! Is it true in the case of GOLD?

  1. Government sometime uses concept of elasticity with respect to the price it charges in the form of tax, sometimes government provides subsidies which is opposite to tax to boost some sectors in industry such as agriculture, or reduce taxes for some products which eventually reduce the price of respective products leading to excessive demand for the product. Elasticity is also used for anti social products such as tobacco and alcohol, government increases the tax for such products leading to increased price of the products thereby causing reduction in demand if the demand is unaltered still the revenue is increased by the way of increased taxes. Demand and supply play a crucial role in macro economics.

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    • Strongly agree Davin !
      Price elasticity can be increased and decreased by certain factors like government intervention in the form of taxes, subsidies.

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  2. There are a variety of reasons that reflect the sale of products. As for different products there should be different pricing strategies. For the normal goods like milk, bread, meat and such living products always popular even if the pricing is increasing. Hence, for this kind of products a slightly decrease of price can increase its sales in large scale. However, for the Luxury which is not necessary for most of the people. Though the large discount is made, there is still not large increase is sales. As a result, to keep the result of getting profit the manager should make different pricing strategies for different products.

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    • That’s what my blog reflects. Necessities like milk would be bought by people even if their price is increasing. Luxurious things like Gold would not be bought by people when their price is increasing. However, a company could boost up its sales by bringing the price down. Even the slightest change in price would reflect a big change in the sales.

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  3. I thought the price of gold was a reflection on how many people were investing in gold at any one point in time – the more people buy gold the higher the demand and hence the higher the price. Astute buyers with surplus cash would certainly buy gold up if the price fell because they know at some point it is likely to go up again – often in response to how the economy is going – and they can sell their gold for a profit. But I guess if the price decreased enough that everyone was buying gold then it may well lose the “worth” people have in investing in gold – and the demand would cease? Gold is a difficult subject for this topic – it’s more of a commodity than a product in itself.

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    • Yes that’s a fact the higher the demand, higher the price of gold. I think commodities like Gold would lose its charm if their prices came down. Because, many people take it as an investment to earn profit. Thanks for the reply, I would research on this and get back to you soon !

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  4. As some of the replies have noted Gold is a difficult product to see purely from a pricing point of view. But that is looking at gold as a commodity.
    Certainly in Melbourne we would not see large price discrepancies at high st retail Jewellers however from experience in places like Dubai’s Gold Souk I can say that the value of an ounce of gold bears strong parallels with the cost final cost.
    Such areas are generally frequented primarily by tourists, whom may not be the best at bartering. However for the savvy consumer it provides a perfect opportunity for that big ticket item spend. One can start their bartering with the knowledge of the rough cost of the raw material and as such the floor to which the merchant can lower the price to, of course this doesn’t account for the cost of production but that is where the bartering get interesting!

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  5. The sale of the produce is driven not only by price but other factors as well.
    Some examples of elastic goods can be movie tickets, vacations, DVDs and books. And examples inelastic goods can be water, Gasoline (to a certain extent) and food.
    But exception to these are goods where if the price increases, the demand increases because the good becomes a status icon. Some examples of these can be an expensive Italian designed suit or a Porsche car or a Louis Vuitton bag.

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  6. I think even in the case of inelastic demand you need to consider to what degree product substitution exists. Yes it is true that people will continue to purchase milk, but if the price is too high then they may elect to substitute some of their normal milk consumption with other products i.e. rather than giving kids a glass of milk with dinner they might have water or soft drink etc. Whilst milk will continue to be purchased the demand could be impacted more strongly depending on the availability of substitutes.

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  7. This article is highly poignant!

    Although it only confronts the case study of gold’s price correlation x demand in India, it sets a foundation/raises the question of said price and demand correlation in regards to gold. As gold is a unique, long standing commodity (or currency, not out-rightly unless you’re Ron Swanson), it seems immune to standard trends in marketing and product sales.

    I did a little bit more research to see if such correlation is evident in any other country at the moment, besides India. Put into consideration that there are varying factors that could restrain sales according to each country – therefore prior to establishing a fixed correlation, several comparisons across different countries has to be made. In India’s case, damages to crops would be an exclusive factor to the nation itself.

    I decided to use China as an additional case study to determine if this correlation is evident across the scope.
    Gold prices around the time-frame in question (third quarter of 2014) were stablized however were still down 3.4% in the year. During this period of time, gold demand in China saw a plunge of 37% which as a result, saw global demand fall 2% from the previous year. As quoted from my Reuters source, “even with gold prices dropping to near four-year lows, buyers in China – the world’s leading market – are not tempted, suggesting prices have further to fall”.

    The use of additional examples of gold’s price x demand correlation will provide a stronger support for your essay’s contention.
    Hope these references help.

    References:
    http://www.businessspectator.com.au/news/2014/11/14/china/global-demand-gold-falls

    http://in.reuters.com/article/2014/11/03/gold-demand-asia-idINKBN0IN0TW20141103

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  8. Elastic and Inelastic demand is a good topic to discuss . Every price indication at different level of demand and have a diverse impact on company’s Marketing objective . In case of Gold price its not elastic demand but is based on value of US dollor . And jewellary demand wont reduce drastically for rise in price of Gold as jewellary are purchased during special occasions like marriage , for giving gifts etc. Elastic demand are popular supermarkets when launch of new products and inelastic demand we can give Apple phones has example as when launch of new phones the price will be high but after certain period they reduce ..Some customer buy high price products by thinking it as better quality..

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    • yes there are various factors that affect price elasticity of gold such as consumer demand. Countries like India have strong demand for gold. even during the inflation period people would buy gold. Thus, gold hold its value. My blog discusses about price elasticity and how it will help companies, therefore I found this news article where gold serves as an exception to price elasticity definition. Thus, companies need to look at macro economic and micro economic factors while fixing a price.
      http://www.economicshelp.org/blog/3099/economics/factors-affecting-the-price-of-gold/

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    • US dollar securities (e.g. US government bonds) are one of the most popular forms of global investment. In the past people have been willing to buy US dollar assets because they have confidence that the US dollar will hold its value (e.g. avoid large devaluation). Therefore, if people suspect the dollar may be vulnerable, they may sell US dollar assets and look for something more secure like other currencies or gold.

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  9. Elasticity of demand is not just a theoretical term but is very practical. There are a lot of life examples on how each type of demand elasticity is achieved. Elasticity of demand means that the degree of responsiveness in quantity demanded relative to changes in demand indicators and other factors being held constant. If we have a commodity like gold or diamond and the price of this decreases or the income of the consumers increase, there will be an increase in the quantity demanded. Elasticity of demand will therefore measure the changes brought about by a decrease in prices of gold or increase in consumers income relative to the changes in quantity demanded brought about by these factors.
    As mentioned in your blog, commodities that have inelastic demands are necessities such as food. The other type of elasticity I want to share is the goods that have close substitute in the markets such as toothpastes. Slight changes in prices of one brand of toothpaste will result to a significant decrease in the quantity demanded from that brand, therefore it is elastic. However, in this case, gold has no substitutes and is considered to be a luxury good. Therefore, it is said to be inelastic.

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  10. Is is interesting post. I used to think that the demand of gold like the demand of gas for car. When the price of gas decreases, people tend to buy more but not a lot more.When the price goes up, people buy less than normal however they need to buy it for car so they still buy it. Beside elastic and inelastic demand, I consider another factor which is “crowd psychology”. I just saw many situations when the price of gold goes up, people tend to buy a lot and when the price goes down, they are going to sell all to reduce their loss.

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  11. There are many economic factors around the purchase of gold and the perception that it is the ‘safe haven’ for investors when there is a suggestions of an economic downturn

    like your article

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  12. Being heavily reliant on consumer nature of buying gold as a financial tool, and also considering its value as international currency, there will always exist a fluctuation in this, same like in the currency market. however, this shouldn’t undermine its prospects. even though stocks and shares had performed better in this context, Gold has been pretty stable in growth perspective.

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