Lithium is the metal that makes electric vehicles tick. But amid a record-high demand for the material, can supply keep up? For over a year, a semiconductor shortage has battered the auto industry, creating supply strains and sending prices for both chips and cars soaring. Now carmakers are preparing for another bottleneck: lithium, a key element in electric car batteries. Electric car sales are at an all-time high, with companies including Tesla, Volkswagen, and Mercedes posting record shipments in the first three months of 2022. But because of the surge in demand, experts are unsure whether enough lithium is available. "In the next two years, even though there will be significant growth in supply, it will be less than demand, so the gap will just continue to grow," lithium and mining expert Joe Lowry, who has earned the nickname Mr. Lithium, recently said in an interview with Bloomberg. Lithium prices have surged a staggering 438% above last year. The increase comes as the amount of the metal used has almost quadrupled over the last decade. But the process for extracting lithium, and a relative lack of investment, have yet to catch up with the rising demand. Extracting lithium is complicated, involving either mining the ore and then separating the metal or pumping underground water deposits to the surface and then extracting the metal from pools. "You can build a battery factory in two years, but it takes up to a decade to bring on a lithium project," Lowry said. The U.S. plans to ramp up domestic lithium production, but currently produces less than 2% of the world's supply. Most lithium mines and reserves are located in South America and Australia, with China largely in control of global supply chains. The lithium supply crunch has not gone unnoticed by electric car manufacturers. Earlier this month, Tesla CEO Elon Musk tweeted about the issue, commenting on what he described as the "insane levels" of lithium prices. "There is no shortage of the element itself, as lithium is almost everywhere on Earth, but pace of extraction/refinement is slow," Musk wrote. Musk again raised his concerns during an earnings call with investors this week, calling for more investment into lithium mining to help close the supply gap. In response to the high lithium prices and supply strain, Tesla announced in March that it would raise its vehicle prices. In China, one of the fastest-growing markets for EVs, companies also raised prices last month as costs for raw materials soared. While the lithium supply crunch may be the most pressing concern for the electric vehicle makers, other rare Earth metals essential to EV manufacturing have also been in short supply this year. Nickel, a critical component of most lithium-ion batteries, has seen a huge price surge in the first few months of 2022. The Russian invasion of Ukraine destabilized nickel's global supply, as Russia was one of the top producers of the metal in 2021. Prices for other important materials used in EV manufacturing, such as palladium, are also rising as the war in Ukraine and disruptions in global distribution networks have created a strained supply. The supply deficit of these crucial metals may cause more electric companies to raise prices this year, potentially undermining what has so far been a blockbuster year in sales.

1.What effect would the shortage of lithium have on the supply of lithium batteries? In which direction would the supply curve for lithium batteries move, and what effect would this have on price and quantity in the lithium battery market?

2.What effect would the increase in demand for electric cars have on the demand for lithium batteries? In which direction would the demand curve for lithium batteries move, and what effect would this have on price and quantity in the lithium battery market?

3. Given the effects you identified in Questions 1 and 2, what would be the net effect on the market for lithium batteries?

4. The article says it takes many years to increase lithium supply.What does this mean for the price elasticity of supply for lithium batteries? Explain why.