1) Assume that the gold-mining industry is competitive.
a) Illustrate a long-run equilibrium using diagrams for the gold market and for the a representative gold mine.
b) Suppose that an increase in jewellery demand induces a a surge for in the demand for gold. Using your diagrams from part a), show what happens in the short run to the gold market and to each existing gold mine.
c) If the demand for gold remains high, what would happen to the price over time? Specifically, would the new long-run equilibrium be above, below or equal to the short-run equilibrium price in part b)? Is it possible for the new long-run equilibrium price to be above the original long-run equilibrium price? Explain.
assume that the gold-mining industry is compitative
a) In a competitive industry, the long-run equilibrium for the gold market occurs when the quantity supplied by all gold mines equals the quantity demanded by consumers. The market diagram would show the intersection of the demand curve and the supply curve at an equilibrium price and quantity.
The representative gold mine diagram would show the cost curve (representing the average cost of production for a gold mine) and the market price. At the long-run equilibrium, the marginal cost curve would intersect the market price at the minimum point of the average cost curve.
b) If there is a surge in jewelry demand, the demand for gold would increase, shifting the demand curve to the right in the gold market diagram. In the short run, the price would increase due to the increase in demand. This higher price would lead to increased profits for existing gold mines.
In the representative gold mine diagram, the higher market price would result in a higher level of profit, and the individual gold mine's marginal cost curve would intersect with the new higher price at a higher quantity of gold production. This would lead to an increase in output for the existing gold mines.
c) If the demand for gold remains high over time, the continued increase in demand would lead to upward pressure on the price. In the long run, new firms may enter the market to take advantage of the high profits in the gold mining industry.
The new long-run equilibrium price would depend on the responsiveness of supply to the higher price. If the supply is elastic, meaning that new firms can easily enter the industry, the long-run equilibrium price would be closer to the original long-run equilibrium price.
If supply is relatively inelastic, meaning that it is difficult for new firms to enter or expand production, the long-run equilibrium price could potentially be higher than the original long-run equilibrium price. This would occur if the increase in demand for gold outpaces the increase in supply.
Overall, it is possible for the new long-run equilibrium price to be above the original long-run equilibrium price, depending on the elasticity of supply and the magnitude of the increase in demand.
a) To illustrate a long-run equilibrium in the gold market, we can use a supply and demand diagram. The market equilibrium occurs when the quantity of gold supplied equals the quantity of gold demanded at a certain price level. In a competitive industry, the supply curve represents the marginal cost of production for gold mines.
The diagram for the gold market would show the intersection of the supply and demand curves, where the quantity of gold supplied by all gold mines equals the quantity demanded by consumers. The equilibrium price would be determined at this point.
For the representative gold mine, we can use a cost curve and a revenue curve. The cost curve represents the average and marginal cost of production for the gold mine, while the revenue curve represents the price at which the gold mine can sell its output. The equilibrium point for the gold mine would be where the revenue curve intersects the cost curve, indicating that the gold mine is maximizing its profit.
b) If there is an increase in jewelry demand, the demand curve for gold shifts to the right, representing a surge in the demand for gold. In the short run, the market price of gold would increase due to the increased demand. However, the existing gold mines may not be able to immediately increase their production to meet the higher demand.
In the short run, each existing gold mine may increase its output as much as it can, given its capacity constraints. This means that the quantity supplied by each gold mine would increase, but not enough to fully meet the increased demand. As a result, there would still be a shortage of gold in the market, even at the higher price.
c) If the demand for gold remains high, the price is likely to continue rising over time. In the long run, gold mines may respond to the higher price by expanding their production capacity or new mines may enter the industry. This would shift the supply curve to the right, eventually leading to a new long-run equilibrium.
The new long-run equilibrium price could be above, below, or equal to the short-run equilibrium price in part b, depending on the specific circumstances. If the increase in demand is temporary, the short-run price would be higher than the long-run equilibrium price because the mines cannot immediately increase their output. As the mines expand their capacity, the long-run equilibrium price would likely be below the short-run price.
On the other hand, if the increase in demand is sustained, the long-run equilibrium price could be above the short-run price. This would occur if the expansion of capacity takes significant time and the increased demand is not fully met in the short run. In this case, the shortage of gold in the short run would drive the price even higher, and it would only stabilize once the industry reaches a new long-run equilibrium with increased production capacity.