ECN211 Macroeconomic Principles

Assignment 1: Real-World Application of Economic Concepts (10 points)

Below is an excerpt from the Wall Street Journal article "Prices on Lithium Deals Start to Move with the Times" by Rhiannon Hoyle, December 8, 2022.

The price oflithiumis undergoing a mini revolution.

Lithiumis the battery mineral used in electric vehicles and electronic gadgets whose price surged to arecord highthis year. Many mining companies missed out, though, because they had previously agreed to sell production at a fixed value. Now, they are increasingly switching to deals that allow for prices to rise and fall according to changes in global supply and demand.

The shift is evident in the outcome of annual supply negotiations that have taken place in recent months, according to analysts. Miners have struck deals linked to prices assessed by companies such as Fastmarkets and Benchmark Mineral Intelligence and adjusted quarterly, though in some cases monthly or even weekly. Volumes are typically fixed for several years, giving consumers security over supply.

With the worldusing morelithiumas the energy transition gathers pace, the new agreements represent a step toward bringing transparency to a market criticized by investors as opaque. It echoes the overhaul of pricing commodities such as the steelmaking ingredient iron ore, which now largely trades at market prices after the practice of agreeing on annual fixed-price contractscollapsed around a decade ago.

At $69,470 a metric ton, the global weighted averagelithiumprice last month was roughly three times higher than a year earlier, according to Benchmark Mineral Intelligence.

"I personally believe the day of the fixed-price contract has been killed by the last 12 months,"Paul Graves, chief executive of the Philadelphia-based producerLiventCorp., told investors last month. "I don't think anybody is renewing their contract at fixed prices." Doing away with fixed-price contracts brings opportunities as well as some challenges.

Moving closer to market-led pricing allows producers to generate more cash when prices are high, which they can then invest in expanding their operations. But for smaller miners seeking to develop alithiummine, fixed-price deals have the advantage of guaranteeing future cash flow that they can use to pay down debt taken on when they weren't making any revenue.

Consumers such as electric-vehicle makers benefit from not being locked into contracts that would see them overpay forlithiumif prices of the critical mineral slumped.

Right now, however, there is a risk that it will drive up prices for electric cars, home battery-storage systems and other products that needlithiumwhensupplies of the critical mineralare tight, according to experts. Already, it is having a big impact on buyers outside the battery sector, who struggle to pay the same high prices for a material that is also used in greases, ceramics and cements, saidDaisy Jennings-Gray, senior analyst at Benchmark Mineral Intelligence.

After reading the summary above, answer the following questions: (2 X 5 = 10 points)

1. Explain the difference between achange in demand and achange in quantity demanded.

1. Explain what would cause achange in quantity demanded and listtwo variables that would cause achange in demand.

1. The article explains that prior to 2022 many lithium mining companies sold their output at fixed prices, rather than prices that were determined by the demand and supply of lithium. Explain why a mining company would be willing to sell lithium at a fixed price.

1. In the article Daisy Jennings-Gray, senior analyst at Benchmark Mineral Intelligence, states: "...'it's safe to say that the vast majority of contracted volume [for lithium] will now be market-led" Explain what Ms. Jennings Gray means when she states trade volume for lithium will be "market led."

1. What has caused the price of lithium to skyrocket in recent years?