Monday, August 31, 2009

Test your understanding of economics in the news: Is this a change in supply or a change in demand?

In the August 30, 2009 article "As hybrid cars gobble rare metals, shortage looms," Steve Gorman explains that the increasing popularity of hybrid automobiles is affecting the market for rare earth metals. What is the likely effect of this? Will the price of rare earth metals increase or decrease? How will this affect the market for hybrid cars?

Part One: The Market for Rare Earth Metals

According to the article, is there (a) an increase in the supply of rare earth metals, (b) a decrease in the supply of rare earth metals, (c) an increase in the demand for rare earth metals, or (d) a decrease in the demand for rare earth metals?

Read the article and then illustrate this change with a graph that shows the initial positions of the supply and demand for rare earth metals and the new positions of the supply and demand curves. Have both curves shifted? Or has there been a shift in only one curve? There is a link after the article (below) that provides the answer.
LOS ANGELES (Reuters) – The Prius hybrid automobile is popular for its fuel efficiency, but its electric motor and battery guzzle rare earth metals, a little-known class of elements found in a wide range of gadgets and consumer goods.

That makes Toyota's market-leading gasoline-electric hybrid car and other similar vehicles vulnerable to a supply crunch predicted by experts as China, the world's dominant rare earths producer, limits exports while global demand swells.

Worldwide demand for rare earths, covering 15 entries on the periodic table of elements, is expected to exceed supply by some 40,000 tonnes annually in several years unless major new production sources are developed. One promising U.S. source is a rare earths mine slated to reopen in California by 2012.

Among the rare earths that would be most affected in a shortage is neodymium, the key component of an alloy used to make the high-power, lightweight magnets for electric motors of hybrid cars, such as the Prius, Honda Insight and Ford Focus, as well as in generators for wind turbines.

Close cousins terbium and dysprosium are added in smaller amounts to the alloy to preserve neodymium's magnetic properties at high temperatures. Yet another rare earth metal, lanthanum, is a major ingredient for hybrid car batteries.

Production of both hybrids cars and wind turbines is expected to climb sharply amid the clamor for cleaner transportation and energy alternatives that reduce dependence on fossil fuels blamed for global climate change.

Toyota has 70 percent of the U.S. market for vehicles powered by a combination of an internal-combustion engine and electric motor. The Prius is its No. 1 hybrid seller.

Jack Lifton, an independent commodities consultant and strategic metals expert, calls the Prius "the biggest user of rare earths of any object in the world."

Each electric Prius motor requires 1 kilogram (2.2 lb) of neodymium, and each battery uses 10 to 15 kg (22-33 lb) of lanthanum. That number will nearly double under Toyota's plans to boost the car's fuel economy, he said.

Toyota plans to sell 100,000 Prius cars in the United States alone for 2009, and 180,000 next year. The company forecasts sales of 1 million units per year starting in 2010.

As China's industries begin to consume most of its own rare earth production, Toyota and other companies are seeking to secure reliable reserves for themselves.

Reuters reported last year that Japanese firms are showing strong interest in a Canadian rare earth site under development at Thor Lake in the Northwest Territories.

A Toyota spokeswoman in Los Angeles said the automaker would not comment on its resource development plans. But media accounts and industry blogs have reported recently that Toyota has looked at rare earth possibilities in Canada and Vietnam.

CLICK HERE FOR THE ANSWER TO PART ONE: THE MARKET FOR RARE EARTH METALS

Part Two: The Market for Hybrid Cars

What affect will this have on the market for hybrid cars? Will a change in the price of rare earth metals affect the supply or demand for hybrid cars? (Hint: Does a change in the cost of inputs affect the supply or demand of a product?)

Will the change in the price of rare earth metals cause (a) an increase in the supply of hybrid cars, (b) a decrease in the supply of hybrid cars, (c) an increase in the demand for hybrid cars, or (d) a decrease in the demand for hybrid cars?

Can you illustrate this change with a graph that shows the initial positions of the supply and demand for hybrid cars and the new positions of the supply and demand curves. Have both curves shifted? Or has there been a shift in only one curve? The link below provides the answer.

CLICK HERE FOR THE ANSWER TO PART TWO: THE MARKET FOR HYBRID CARS

2 comments:

  1. Theirs always a lack of economic understanding.

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