South-Western College Publishing - Economics

 

 

Do you know what tungsten is?  Well, it’s now more expensive…

Subject

Price of tungsten has increased in the last few months.

Topic

Supply and Demand, Equilibrium; Elasticity

Key Words

tungsten, price, export quota, demand

News Story

             Tungsten prices worldwide have increased by over 100% since the beginning of 2005, rising from $9,000 per ton to about $22,000 per ton.  What is tungsten?  Why is its price increasing? 

            The first question is easy to answer.  Tungsten (it’s fun to say that name) is a mineral used to harden metal, from saws to turbines.  The U.S. has a stockpile of it, similar to the U.S. oil stockpile around the Gulf of Mexico.

            The answer to the second and third questions is a little more complicated.  First, China dominates the tungsten market, producing about 85% of the world’s output and consuming about 40% of the world’s tungsten demand.  China’s demand has increased about 30% since last year, due to its quickly developing manufacturing demand and the need for hardening products.  Global demand has increased as well, but not at a slower rate relative to China.  At the same time, Chinese tungsten production has increased about 70%, stemming the global and Chinese price increases somewhat. 

At the same time, though, China is also seeking to restrict supply by trying to close small, illegal mines by blocking deliveries of explosives to them.  While many small mines have closed, some of the larger mines were also forced to temporarily close last year due to electricity shortages arising from an inability to keep up with national demand for power.  Making matters worse, the Chinese government has also imposed an export quota on tungsten in an attempt to decrease the domestic price of tungsten, and increase the global price.  As a result of the inability of global supply to keep up with global demand increases, the price of tungsten is expected to remain quite high.

Questions

1.

Indicate with a graph of supply and demand the situation in the international market for tungsten.

2.

Using a rough estimate, calculate the elasticity of supply of Chinese tungsten using information found in the article.

3.

Indicate what is happening in the Chinese market for tungsten with a graph of supply and demand.  What is the point of the export quota?.

Source

“Hard Luck.”  The Economist.  14 April 2005. 

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