Microeconomics Case Study

Do Soaring Price and Mounting Demand in Indian Gold Market Speak of a Paradox?

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Abstract:
This case study carefully disentangles the causes and effects of the mounting demand for gold in India and helps analyse the shape and shift of demand curve for gold.

India, the world’s largest gold consumer, accounts for 25% of the total demand for gold. Gold plays a major role in Indian culture. Festivals like Diwali and Akshaya Tritiya are considered very auspicious for purchasing gold. More than the price of gold, income is the main determinant of the demand for gold. In India, an increase in income is always accompanied by an increase in demand for gold, irrespective of its price. The entire world in 2008 witnessed uncertain economic conditions resulting from the global recession, which made investors switch their funds from distressed financial assets to the ever-alluring gold. This increased the demand for gold and kept the gold prices high, thus presenting the ultimate paradox of soaring price and mounting investment demand for gold. This paradox was not witnessed in the case of gold jewellery demand, as its demand started falling due to high gold prices and falling income levels of many due to worldwide recessionary impact.

Pedagogical Objectives:

• To understand the concept of demand
• To analyse the shape of demand curve
To understand the difference between change in quantity demanded and shift in demand.

Keywords : Concept of Demand, Demand Curve, Movement along Demand Curve, Shift in Demand Curve, Non-Price Factors of Demand, Demand for Gold in India, Investment Demand for Gold, Paradox of High Gold Price and High Gold Demand, Substitution Effect of Price Change on Quantity Demanded, Income Effect of Price Change on Quantity Demanded, Managerial Economics, Microeconomics, Economics for Business, Business Economics, Economics for Managers, Paul Samuelson