Microeconomics
Economics
Which are the determinants of demand for lithium mentioned in the article? Make sure to distinguish between the quantity demanded and demand. Use the concepts developed in class (e.g. substitutes or complements, preferences, etc.)
Lithium is the lightest of all metals. It is used in: cell phones, laptops, Black Berries, I Pods and hybrid cars. The development of this technology is mainly focused on using them as power sources for electronics and cars. However, as costs of other raw materials have increased, this commodity is becoming a cheaper alternative. as, wind and solar systems have expanded, to address the increases in demand for electricity. Since is lithium carbonate, it is a vital ingredient in batteries, with its consumption increasing between: 2003 and 2007. As a result, this improving demand for lithium; means, that it is quickly becoming viable substitute for other products (such as nickel). A good example of this can be seen with Toyota considering its usage in the Prius. as, the costs of nickel have risen so much, that it is becoming more economically advantageous to use lithium in their products. (“The Saudi Arabia of Lithium,” 2008)
Which are the determinants of supply of lithium mentioned in the article?
The determinants of supply include: the total amount of extractable lithium that can be mined cost effectively. This will have a major impact upon: supplies and prices. As the amount of lithium that can easily be removed will have an effect on: the total quantity that is available. Once this takes place, it will have an impact upon supplies by: reducing the number of affordable reserves, resulting in sudden price increases. (“The Saudi Arabia of Lithium,” 2008)
If useable lithium reserves are indeed limited (as speculated in the article), what would be the implication for the own-price elasticity of supply? This answer depend on progresses in lithium-extraction technology? Say hypothetically that demand kept following the trend of recent years, what would be the implication for the price of lithium, lithium batteries and, last but not least, lithium-powered cars? In this light would it be wise to focus strongly on the development of lithium powered cars (some companies are attempting to follow this strategy?
This would have negative implications, as it caused the total number of supplies to increase. At which point, the prices will begin to rise due to: the low number of inventories on the market. The reason why this is occurring is because: this commodity is being increasingly used in a variety of products. If prices continue following the same trends, this will cause them to skyrocket. as, lithium will become utilized in a variety of everyday products, that are in demand. For automakers this is prudent strategy. The reason why, is because there are not a lot of choices they have for similar commodities. In order to diversify themselves against sudden shifts, this kind of strategy must be embraced. (“The Saudi Arabia of Lithium,” 2008)
Part B
Find the short run and the long run own price elasticity of demand for gas from the article. Why are the two different?
The short-term price elasticity for demand is: that there will be a sudden slow down in consumers’ appetite for gasoline. This will cause economic activity to: slow and increase the possibility that a recession will take place. The long-term price elasticity is: that consumer demand will shift and that alternative products could be introduced as competitors. The two are different, because one will have negative short-term implications on the economy. While, the other is having more positive effects, by addressing long-term supply issues. (“Americans Start to Curb Their Thirst for Gasoline,” 2008)
Find the income elasticity of demand for gas.
The income elasticity for demand is when prices rise by 10%, as this will have .6% increase on inflation. This is problematic, because as gasoline rises by this amount, it means that consumers will continue to adjust their usage. (“Americans Start to Curb Their Thirst for Gasoline,” 2008)
Cost and Production
The higher that cost increase the more direct impact that it will have on the product. Evidence of this can be seen with information compiled by the Energy Information Administration. They found, that when personal spending decreases by 1%, this will have an impact upon demand (cutting it .5%). (“Americans Start to Curb Their Thirst for Gasoline,” 2008)
Part C
Given our discussion of cost in class, what arguments could be made as to why outsourcing the orders at the drive-through counters would help McDonalds cut cost? Again, keep in mind that the consideration here is not to higher cheaper employees.
This would help to maximize profits and reduce costs. The reason why, is because the call center can handle the activities for all of the drive throughs. While the staff at each location, can take care of the local customers. (“The Long-Distance Journey of a Fast-Food Order,” 2006)
McDonalds has recently experienced massive increases in firm profits. Given what we discussed in class, would you argue that this is mainly an outcome of the mentioned cost-cutting measures?
Yes. These cost cutting measures, mean that it will be easier to beat the year over year numbers. At the same time, they can hit the high end of the Wall Street analysts’ expectations for stock. (“The Long-Distance Journey of a Fast-Food Order,” 2006)
Part D
Pirating has been on the rise in particular in the Indian Ocean where many ships travel from Asia to the Mediterranean Sea through the Suez Channel. Thinking of the alternatives, why are firms likely willing to pay so much ransom?
The reason why is because the cargo is expensive, as the commodities and the ship are worth millions of dollars. At the same time, not paying the ransom will mean, that crew will be executed. This will more than likely, will lead to increased litigation from these actions. Therefore, it is advantageous to pay the ransom. (“Somali Pirates Hijack Tanker with Almost 2 Million Barrels of Oil Destined for U.S.,”2011)
Despite the drastic increase in piracy in the region over the past decade, the international response has been moderate at best. For the most part (industrialized) countries are protecting only their own vessels (and even then not always), rather than establishing an effective international task force, say under UN or NATO command to guarantee safe passage. Briefly explain why it is difficult to reach such an agreement? What type of good would such a service qualify as?
The reason why it is so difficult to reach an agreement is: because of the vast distances involved and the areas are near the coastal waters of host of countries. This makes issues of: jurisdiction and the use of force questionable. This kind of service would help to address the increases in: attacks and prevent these kinds of activities from occurring. Once this takes place, it means that shipping cost will decline. (“Somali Pirates Hijack Tanker with Almost 2 Million Barrels of Oil Destined for U.S.,”2011)
Similar problems do not occur along the coastlines of most countries, poor as they may be (Egypt is a good example at least prior to its revolution). Piracy outside Somalia is particularly rampant, since Somalia has not had a functioning central government since 1991. Why would it be more feasible to enforce safe passage for a local national government (no matter how poor) than for an international task force made up by the richest countries in the World?
This will ensure that everyone is protected and it would create a force that has the power to track down the pirates. (“Somali Pirates Hijack Tanker with Almost 2 Million Barrels of Oil Destined for U.S.,”2011)
Part E
Coles and Woolworths between the two retailers hold about 80% of the market share in Australia. What type of market structure would retailing have to be in order for such a loss-leading strategy to work? What kind of structure creates such an industry?
The kind of structure that would need to be in place is one that is based on: larger numbers of lower priced products. The type of configuration that would create such an industry is: having a large number of competitors in the market (with a variety of brands). (“Woolies denies existence of beer price,” 2011)
Hypothetically, if both firms go through with this strategy and succeeded (i.e. they drive out the remaining competition in retail), what would be a long run concern for at least one of the two firms? (Note, this is not a question about collusion).
The possibility that their other competitor; may engage in tactics that could undercut their market share. This is problematic, because it means that the other company could: dramatically cut prices or try to create shifts in consumer demand (through substitute products). (“Woolies denies existence of beer price,” 2011)
Finally, Fosters is not exactly a small fish itself. Positive PR aside, what is Fosters strategic motivation to boycott their retailers’ attempts to reduce retail prices of their product?
It is designed to create an image of: superior quality and price. When retailers begin reducing prices, this can have an adverse impact upon that image. From the company’s view, engaging in these kinds of tactics will protect their underlying profit margins. (“Woolies denies existence of beer price,” 2011)
Bibliography
Americans Start to Curb Their Thirst for Gasoline. (2008). WSJ.
The Long-Distance Journey of a Fast-Food Order. (2006). New York Times.
The Saudi Arabia of Lithium. (2008). Forbes.
Somali Pirates Hijack Tanker With Almost 2 Million Barrels of Oil Destined for U.S. (2011). Forbes.
Woolies denies existence of beer price. (2011). ABC News.
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