Explain the Key Demand Side Drivers of Price for a Given Good or Service

1 (a) EXPLAIN THE KEY DEMAND SIDE DRIVERS OF PRICE FOR A GIVEN GOOD OR SERVICE

i. Introduction

This essay segment aims to define and illustrate the dynamic link between the Demand function and Price. The relevant economics theories will be defined and illustrated in the context of a choice of good (in this instance Gold). The key demand side drivers of price for gold will be explained through its end-use applications to show an interesting mix between the classic relationship of demand-price elasticity and divergence from that.

ii. Why is it important to understand this?

To maintain competitive advantage and maximise profitability, a firm can look at two aspects, i.e.

i) cost drivers (to reduce cost) and

ii) demand drivers (to increase demand)

A reduction in cost or increase in demand (or both) can gain and sustain the firm’s competitive positioning. To raise revenues, three outcomes are possible…

a) manufacture for less cost (production driven)

b) sell it for more (demand driven)

c) sell more of it (demand driven)

Since two of the three outcomes are Demand driven it is thus important to analyse how price within those can either increase or decrease the demand for a given good or service. Typically, the Key determinants of Demand are categorised as:

i. income

ii. tastes and preferences

iii. the price of related goods

iv. changes in expectations of future relative prices (causing price volatility)

v. population (i.e., market size)

vi. availability of substitutes

iii. Choice of Good and rationale

For this essay I chose gold because the demand for it has special characteristics relative to other goods or commodities. Whilst demand for gold is generally from around the world, the top five Gold consuming countries according to the World Gold Council are China, India, USA, Turkey and Saudi Arabia with China and India accounting for most gold consumption (compared in Figure 1 below).

Figure 1...