Question

Consider the market for lithium. Using a single, fully-labelled demand and supply diagram, illustrate the combined demand and supply effects that have taken place in the lithium market over the past 3 years. Discuss the factors that have driven the changes to demand and supply and the effect on equilibrium price and quantity. [Note: You do not need to use actual data for this diagram and you can assume the market is competitive as assumed in Chapter 4 of Gans et al. (2018)]

Using a fully-labelled demand and supply diagram representing the market for oil, illustrate the likely long-term effects that the lithium market might have on the market for oil. Provide an explanation of your analysis as well as the relationship between the two markets. [Note: You do not need to use actual data for this diagram and you can assume the market is competitive as assumed in Chapter 4 of Gans et al. (2018)]. What effect might the increasing availability of lithium over time have on the own-price elasticity of demand for oil? [Note: You do not have to show this in your diagram]

Answer 1

Since inception if electrical vehicles past 3 years and its manufacturing across globe has caused the demand for lithium batteries to skyrocket. Since newly mined lithium is not readily available the supply is also low across globe due to demand shocks. Hence the equilibrium price has been higher and quantity have been lower.

Long term effects assume that the electric vehicles will replace fuel based vehicles which is made up of crude oil.

Hence this will causes supply to drop consewuently across globe as crude oil is majorky used for diesel and petrol.

This will lead to adverse negative demand shock and prices will fall considerably with decrease in quantity.

Thus price elasticity of oil becones inelastic that is any changr in prices will not deter its quantity as it will be replaced by lithium for car manufacturers.

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