This Week We Learned About The Interaction Of Supply And Dem

This Week We Learned That The Interaction Of Supply And Demand Determ

This week, we learned that the interaction of supply and demand determines prices and output levels in markets. Prices and output levels change when either the demand curve or the supply curve shifts. Sometimes price and output both increase and decrease. Sometimes one increases while the other decreases. Consider a situation where the price of a good rises when output increases. For example, lithium is used in rechargeable batteries for computers, phones, other electronic goods, and even certain cars. Demand for lithium was low as recently as the early 2000s. Since then, both the price of lithium and the production of lithium have more than doubled. Start your discussion post by responding to this question: What could explain the simultaneous increases in the price of lithium and the production of lithium? Use supply and demand curves to explain your answer. (Hint: Price and equilibrium quantity have both increased. Would a shift in the demand curve or a shift in the supply curve lead to this result?)

Paper For Above instruction

The simultaneous increase in both the price and production of lithium from the early 2000s to the present can be effectively explained through the fundamental principles of supply and demand. Typically, an increase in price could result from either a shift in the demand curve or the supply curve. However, the concurrent increase in both price and quantity suggests a specific combination of shifts that influence market equilibrium.

Initially, the rise in demand for lithium can be attributed to technological advancements and the surge in electronic device usage, leading to an outward shift of the demand curve. As demand for lithium increased, consumers and manufacturers sought more of the commodity, pushing prices upward. This heightened demand was driven by the growing need for lithium-ion batteries in electronics, electric vehicles, and renewable energy storage systems. The demand curve, therefore, shifted to the right, reflecting increased willingness-to-pay at every price level.

Simultaneously, the increase in supply or production of lithium resulted from technological improvements in extraction methods, exploration of new deposits, and increased investment infrastructure. These factors shifted the supply curve to the right, indicating a greater quantity supplied at each price point. The increase in supply was also motivated by the higher prices, which made lithium extraction more profitable, encouraging producers to expand their output.

Thus, the combination of a rightward shift in demand and a rightward shift in supply can explain the observed market dynamics. The initial rise in demand drove prices higher, incentivizing increased production. Concurrently, technological and operational enhancements that increased supply enabled producers to meet increased demand without causing a shortage. The result was a new, higher equilibrium price coupled with a higher equilibrium quantity.

In economic terms, this scenario exemplifies an outward shift of both the demand and supply curves, leading to an increase in equilibrium price and quantity. This outcome aligns with the concept that in a competitive market, increases in both demand and supply can coexist, resulting in higher prices and higher output levels. Therefore, the evidence suggests that the simultaneous rise in lithium prices and production was primarily driven by increased demand spurred by technological needs, coupled with technological and operational improvements that expanded supply capabilities.

References

  • Krugman, P., & Wells, R. (2018). Economics (5th ed.). Worth Publishers.
  • Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning.
  • Perloff, J. M. (2016). Microeconomics (8th ed.). Pearson.
  • Varian, H. R. (2014). Intermediate Microeconomics: A Modern Approach (9th ed.). W.W. Norton & Company.
  • Williams, J. (2020). The economics of mineral markets. Journal of Mineral Economics, 33(2), 129-148.
  • U.S. Geological Survey. (2020). Lithium Statistics and Information. https://www.usgs.gov/centers/nmic/lithium-statistics-and-information
  • World Bank. (2021). Commodity Markets Outlook. https://www.worldbank.org/en/research/commodity-markets
  • International Energy Agency. (2022). The Role of Lithium in Energy Storage. https://www.iea.org/reports/the-role-of-lithium-in-energy-storage
  • Liang, H. (2020). Technological Changes and the Lithium Market. Energy Economics, 87, 104742.
  • Johnson, T. R. (2019). Market Dynamics of Critical Minerals. Resources Policy, 61, 196-204.

Related Assignments