macroeconomics, homework, finance, development-economicsI need a concrete example. I’m an International Relations major writing a paper on Iran’s economy but I have to understand some of the basics. The wikipedia article is vague and not helpful.
Speculative demand occurs when people buy something, not for their own actual use, but because they expect its price to rise, and thereby to make money “trading” it.
An example was when oil prices went over $140 a barrel in 2008. The world was on the brink of a global recession (meaning that there would soon be LESS demand for oil), but people jumped on the “bandwagon” of high oil prices, just because they had risen recently.
A similar effect pushed gold up to $875 an ounce in 1980, a level it did not return to until three or four years ago.
As this is a homework question, here are some leads to get you started:
What have you learnt about speculative demand versus some other type of demand?
What goods and services does Iran trade internationally, that play an important part in its economy?
What are the main drivers in those market?
Do they have forward markets and spot markets? If both, how does the size of the forward market compare with spot, and are the same players in each market?
Is the good or service fungible, with several international competitors at a similar scale to Iran? To what degree is it a Free Market? How might that relate to speculative demand?
If its market has derivatives, how does the turnover value of the derivatives compare to the absolute usage rate of the good or service?
The best example is in housing markets the world over. Suppose that you do not really need a house but expect house prices to rise in a particular area for some reason (e.g., booming economy so people are getting richer and will want to buy houses of their own; the area is about to be connected by a metro/train, increasing its attractiveness as a residential property, etc.). A good idea (if you are sure the prices will rise) is to buy a house right now at a low price, wait for the prices to increase and then sell it for a net gain. Since you are speculating that the prices will rise, the resulting demand is called speculative demand.
This is kind of speculation can be very lucrative. However, note that this means a lot of buyers are in the market simply to re-sell the house later on and will not really consume the good. In economic jargon, such a circumstance leads to what is called a bubble: the price in the market exceeds the price dictated by “real” demand, or “fundamentals”, due to speculation.
Eventually, bubbles burst. Roughly speaking, the reason for this is simply that the fundamentals of the market do not justify a sky-high price. As a result, after a few months (or years) of rising house prices, potential speculators realize that the price is not going to rise any further. But now no speculator wants to hold on to the good! There is a flurry of selling and prices fall dramatically.
EDIT: Other examples include speculation in the stock market, and in the market for foodgrains in many countries.
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