Question 1

On December 28, 2023, the Wall Street Journal published an article titled "Low Battery Metal Prices Set to Persist in 2024, Adding Friction to Energy TransitionLinks to an external site.". These battery metals include elements such as lithium, cobalt, and nickel, but you can think of them as a single product, "battery metals." According to the article, the battery metal market will continue to face low prices due to increased supply and weaker-than-expected demand. It is not necessary to read the article as all relevant information is included in the question narrative.

The article explains: "Prices for metals used in batteries swooned in 2023, as rising supply and weak demand drove lithium to its cheapest level in two years, cobalt to its lowest point in four and nickel to its pandemic-era nadir. With supply increasing and demand falling short of expectations, prices have fallen."

For Question 1, graphically depict the demand and supply in the market for battery materials in 2022 (prior to the changes described in the article) and label the equilibrium price and quantity. Label the horizontal and vertical axes. Assume that the demand curve is downward-sloping and the supply curve is upward-sloping. Label the 2022 supply curve as S0; the demand curve as D0; the equilibrium price as P0; and the equilibrium quantity as Q0.

Question 2.

Anticipating high demand for electric vehicles (EVs), mining companies expanded production of battery metals leading into 2023. However, the increase in demand for EVs in 2023 was lower than expected due to slower-than-expected growth in consumers' incomes. (In other words, demand still increased, but it was a relatively small increase).

• Graphically illustrate how the rising supply of battery metals and weak demand for EVs affected the battery metals market in 2023. Label the new supply curve S₁ and the new demand curve D₁. Clearly show the direction of any shifts with arrows; and keep in mind the relative magnitude of changes in supply and demand as described in Questions 1 and 2. Specifically, make sure to draw S₁ and D₁ in such a way that the new equilibrium price is consistent with the information provided in the Wall Street Journal article quoted in Question 1.
• Label the new equilibrium price P₁ and the new equilibrium quantity Q₁. Compare the new equilibrium to the original equilibrium; and explain what happened to price and quantity.