Question

1) Consider the market for copper. Show graphically and explain using economic intuition under each of the following cases. (Do each case separately.)

a) The American economy falls into a recession and so incomes decrease. (Assume that copper is a normal good.)

b) A labor strike in Chile greater reduces copper production.

c) New inventions make it cheaper to extract copper from copper mines.

d) The price of aluminum – a substitute for copper – skyrockets.

e) New inventions increase the uses of copper.

Answer 1

a) Copper is a normal good and the income of its consumers increases. This indicates that they are likely to buy more copper units at the same price. Thus in the market for copper, the demand increases and demand curve shifts to the right. At the new equilibrium, price is higher and quantity is also higher

Effect of an increase in demand Price ($) Supply curve SS -------- F '. D'D' Demand curve DD QO Q1 Quantity

b) There is a reduction in the quantity of copper supplied at every price. Thus in the market for copper, the supply decreases and supply curve shifts to the left. At the new equilibrium, price is higher and quantity is lower

Effect of a decrease in the supply Price($) S'S Supply curve SS P1 E------- --- F Demand curve DD QI QO Quantity

c) This reduces cost of production of copper. There is an increase in the quantity of copper supplied at every price. Thus in the market for copper, the supply increases and supply curve shifts to the right. At the new equilibrium, price is lower and quantity is higher

Effect of an increase in supply Price($) Supply curve SS PO -- - - - - - - - - - - - - Demand curve DD - - - QO Q1 Quantity

d) There is an increase in the price of a substitute of copper. This would decrease the quantity demanded of the substitute and increase the quantity demanded of copper at every price. Thus in the market for copper, the demand increases and demand curve shifts to the right. At the new equilibrium, price is higher and quantity is also higher

Effect of an increase in demand Price ($) Supply curve SS -------- F '. D'D' Demand curve DD QO Q1 Quantity

e) If copper can be put to many uses, its demand should be higher. Thus in the market for copper, the demand increases and demand curve shifts to the right. At the new equilibrium, price is higher and quantity is also higher

Effect of an increase in demand Price ($) Supply curve SS -------- F '. D'D' Demand curve DD QO Q1 Quantity