What would happen to gold prices if the supply was elastic?

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Expert Solution

Currently, supply of gold is fixed, therefore gold has inelastic supply with vertical supply curve. Since demand for gold is rising, price of gold is increasing with time but quantity is unchanged. However, if gold supply were elastic, supply curve would be upward rising, therefore the same increase in demand would have led to a lower increase in price and an increase in quantity compared to the case where gold has inelastic supply.

In following graph, S1 is the vertical, inelastic supply curve and S2 is the upward rising, elastic supply curve for gold. Initial equilibrium is at point A where demand curve D1 intersects both S1 and S2 with price P1 and quantity of gold Q1. When demand rises, shifting D1 rightward to D2, it intersects S1 at point B with higher price P2 but same quantity Q1, and S2 at point C with higher price P3 and higher quantity Q2. It is seen that (P3 - P1) < (P2 - P1) [i.e. increase in price is less] and Q2 > Q1.

Rahul Sunny answered 1 year ago

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