Answer to Question #304193 in Microeconomics for mamalee

Question

Problem two: Aluminium pricing

For this question, refer to the article from The Economist magazine titled “A coup in

Guinea adds fuel to aluminium’s red-hot rally”.

a) The article identifies a number of factors behind the recent increase in the price of

aluminium. Mention these factors and indicate whether they are demand-side or supplyside factors.

2

b) With the aid of a well-labeled diagram, illustrate the effects of the factors identified

in part (a) above on the equilibrium price and quantity of aluminium. Pay attention to

the statement in the article that “Supply constraints, however, have been more

important” when drawing your diagram.

Answer 1

a)

Increase in the number of consumers in the market. there has been a growth in demand for Aluminium for construction. America, China, and Europe have developed plans to spend more generously on infrastructure hence further bolstering the demand.

This is a demand-side factor.

Increased demand for complementary products. the demand for electric vehicles which contain a bite more Aluminium than conventional cars has pushed up the demand for the Aluminium metal. This is a demand-side factor.

Shortage of Aluminium supply in other world markets. In August a fire put a large refinery in Jamaica out of action, Rio Tinto has experienced workers strike at a smelter in Canada and other disruptions in China have increased the demand for this metal in Guinea hence supply constraints have been more important.

This is a supply-side factor.

b)

From the graph, the demand curve has shifted from D to D¹. This is because of supply

constraints have been greatly experienced in other competitive world markets like Canada, Jamaica and China as mentioned above hence the statement, “Supply constraints, however, have been more important”.