South-Western EconNews

Jewelry Industry Hopes Marketing Campaign is Golden

Subject

Comparative statics

Topic

Equilibrium

Key Words

Gold, central banks, manufacturers, consumers, incomes, budget, prices

News Story

Currently, gold trades at approximately $260 an ounce, a historically low figure. The primary reason is that over the past two years central banks have been selling gold.

The World Gold Council, which represents jewelry manufacturers, wants to reverse the trend. It is launching a $20 million marketing campaign designed to "re-brand gold" - to persuade consumers that gold, not diamonds, are a girl's best friend. It wants consumers to perceive gold as a fashionable metal from which to make jewelry; over recent years, gold has lost its air of exclusivity, particularly among those with higher incomes. The Council is also hoping that consumers will want to buy more 18- and 24-carat gold, rather than 9-carat gold.

Members of the Council will have to increase their dues from $1 per minted ounce to $2 in order to pay for the campaign. This will increase the Council's budget to $55 million. However, store prices are not expected to be affected significantly as a result.

(Updated March 1, 2001)

Questions

Draw a supply and demand diagram of the market for gold. Mark the initial equilibrium price and quantity.
a) Show the effect of the sale of gold by central banks on the equilibrium price and quantity of gold. Mark the new price as $260.
b) Explain why you moved the curve you did. Which determinant of supply or demand changed?

a) On a diagram of the market for gold jewelry, show the consequences for the equilibrium of the change in gold prices you identified in Question 1.
b) Why did you move the curve you did? Which determinant of supply or demand changed?
c) Why do you think the jewelry manufacturers and retailers were concerned?
d) Show the effect of the increase in Council membership fees on the equilibrium.
e) Why did you move the curve you did? Which determinant changed?
f) Why did the jewelry manufacturers and retailers expect little change in the price?
g) Now show what is intended to occur as a result of the marketing campaign to re-brand gold. Mark the new equilibrium.
h) Why did you shift the curve you did? Which determinant is expected to change?

Source

Katherine Griffiths, "Gold industry in $20 million campaign to restore precious metal's lost sparkle," The Independent, February 12, 2001.