Microeconomics Weblog

Copper

Demand is a person’s desire and willingness to pay for a specific good or service at a given price over a given time period. Every person has different needs and wants. The law of demand assumed that all other factors are remaining equal, the quantity demanded on a good or service increases as its price falls and vice versa. This shows an inverse relationship between the price and demand. For instance, the graph below has shown that the global copper price has dropped while the demand for copper has risen. The increase in demand will be shown by a movement along the demand curve. (Commodityonline.com, 2013)

Furthermore, there are two underlying reasons causing the occurrence of law of demand, which are income effect and substitution effect. These effects able to let people know how the consumers react to a price rise by buying less and vice versa. Income effect represents the effect of change in price of a good arises from the consumer’s purchasing power become better or worse off. For instance, when the price of a good has risen, consumers will not purchase more on the particular good as they would think that they are  unable to afford to buy so much as their real income have fallen and so the purchasing power. While substitution effect is the effects of a change in price on of a good arises from the consumer switching to or from an alternative product which is also known as substitute goods. When the price of good A risen, the consumers react to the lower price by substituting or switching to good B which is a substitute good to good A, results in buying more of  Good B and less of good A. For instance, economists predicted that there is a substitution effect away from copper regarding the global copper price continuously rising towards aluminum and plastic as these provide lower installation and material costs. (Riley, 2012) 

    

When the price of copper falls, the consumption increases by A₁ to A₂ as the consumer moves from W to X. The substitution effect, A₁Z, from point W to Y, changes the relative prices but keeps real income constant. The income effect,   ZA₂, from Y to X keeps relative prices consistent but increases purchasing power. 

On the other hand, besides price, there are other determinants of resulting the increase or decrease of demand. These determinants will cause a shift in demand curve. They are:

•         The prices of related goods

When the price of copper increase, the demand for aluminum will be increased as both have a substitute relationship.

When the price of copper increase, the demand for hybrid cars will be decreased as hybrid cars make use of a great amount of copper. A decrease in the using of hybrid cars would result in a decrease in demand for crude oil. This is due to the complement relationship between car and crude oil. 

•      Expected future price

When consumers predict that the price is going to rise in the future, they are intend to purchase the good by now before the price goes up, leads to a consequence of an increase in demand for that particular good.

•  Income

Consumers are not intending to purchase more when their incomes have fallen, which means purchasing power has fallen relatively.

•   Population

The greater the population in a country, the greater the quantity demanded would be incurred in the country.

•   Preferences

Different consumers have various preferences on the goods. The more the consumers enjoy a particular good’s feature, the higher the quantity demanded for the good.

            Increase in quantity demanded consequence of more supply would be needed and vice versa.

Supply means a firm produces a good or service with the resources and technology the firm has which fulfilling consumers’ needs and wants in order to make profit at a specific time period. The law of supply states that when other things hold consistent, the higher the price of a good, the greater the quantity supplied and vice versa. This shows a positive relationship between price and supply. For example, demand for global has increased and this led to an increase in copper price. Firms found that it is an opportunity to generate more revenue, therefore, they might produce more copper by opening new mines. Chile has the largest scale of copper mine production among worldwide. Copper mine production has risen in 2007. This has shown by a movement along in the supply curve. (Commodityonline.com, 2013)

 Other than price, the other determinants of causing increase or decrease in supply are:

·         The prices of factors of production

The lower the costs of production, the firms are more likely to produce more. One of the factors of production is labour. In 2006, there were several labour strikes happened at some of the world’s largest copper mines in Chile due to low wages. Hence, an increase of the labour pay by firms will lead to a significant increase in the global copper price. (AccuVal Associates Inc., 2007)

·         The prices of related goods produced

If a product can be selling at a higher price than previous product, the firms are more likely to produce it instead of the previous one. This is known as substitute in supply.

Whereas the price of a product is produced with another good at the same time which can be known as goods in joint supply is increase, the supply of another good also will increase.

·         Expected future prices

If the firms expected the price is going to rise in the future, they may keen on keeping the goods and sell off the goods when the price goes up.

·         The number of suppliers

When there are new firms enter into the market, as a result supply is likely to increase.

·         Technology

Advanced technology may affect different outcomes of the supply amount. To illustrates, the use of copper is likely to decrease as it is displaced by the innovative creation such as wireless sand fibre optics. (Riley, 2012) 

·         State of nature

One of the factors affecting the supply is the weather. The mines, production process, and transportation of raw materials can be affected by natural disaster such as floods and cyclones as it destroying the infrastructures such as roads, railways and bridges. (AccuVal Associates Inc., 2007)

However, the continuance of high demand and high supply will result in scarce of resources in the future. 

Therefore, not everyone’s needs and wants are fully fulfilled.

               Scarcity is the fundamental economic problem of humans which wanting more over what they can 

actually produce. Scarcity is results from the sparse of resources, limited amount of resources might be 

resulted from different factors of production such as labour, land and materials. People are more intended to 

own rare goods. To solve this problem, society has to start in reducing the demand or increasing the supply, 

or approaching both methods. For example, China has the biggest consumption of copper over the world, 

they use copper extensively in infrastructure such as plumbing, telecommunication wiring, building materials 

and manufacturing equipments. (Hammer et al., 2012) However, the world is facing the problem of copper 

materials shortage crisis now due to the copper is a rare type of metal and also a non-renewable resource, 

demand growing rapidly while supply of copper is getting insufficient. During 1^st of February 2010, the 

copper in warehouse was continuously fall down by 5^th of January 2011.

(UBS Estimates, 2012)

 (Info Mine Inc, 2011)

            Scarcity leads goods to a higher price due to the high demand, and low supply. By tempting to achieve higher revenue, more firms wanted to enter into the market. However, some markets have a high barrier to the entry.

           Barriers to entry are a kind of legal protection to the firms to avoid the entry of firms into an 

industry and thereby limiting the amount of competition faced by the existing firms. Barriers to entry can be in 

various forms, such as government’s rules and regulations, brand loyalty, patent and copyright. There is high 

barrier to enter copper mining industry due to the high start-up costs. Comprehensive infrastructures need to 

be in place for the sake of sustaining mining operations. Advanced, specialized technology and equipments 

are needed and also workers with specialized knowledge, skilled or high qualifications, thus, high capital and

labour cost are incurred. Besides, environmental standards, rigid rules and regulations have set and need to 

be met. In addition, higher costs are involved by expanding existing mines to over through the problem of low 

supply of copper and it takes a long procedure to attain the limited numbers of new mines. For instance, 

Olympic Dam mine in Australia was officially launched after spending fourteen years to discover ore 

deposits. Moreover, there are plenty of established mining companies have already dominated the copper 

market. (AccuVal Associates Inc., 2007)

               In conclusion, the demand, supply, scarcity and barriers to entry and every economic concept will

be linked in every industry.

Reference list:

AccuVal Associates Inc. (2007) Copper: Consumption & Pricing to Rise; Shortage of Raw Materials. Available from: http://www.accuval.net/insights/industryinsights/detail.php?ID=32 [Accessed 01 Jun 2013].

Commodityonline.com (2013) Copper,Copper Price,LME Copper,Copper Mining,Copper Futures. Available from: http://www.commodityonline.com/commodities/metals/copper.php [Accessed 03 Jun 2013].

Forbes (2011) Resource Scarcity. YouTube [video]. 02 February. Available from: http://www.youtube.com/watch?v=LwS5PPuLrOA [Accessed 01 June 2013].

Geoff Riley (2012) Markets in Action - Market for Copper. Available from: http://www.tutor2u.net/economics/revision-notes/as-markets-copper.html [Accessed 01 June 2013].

Hammer, A. and Jones, L. (2012) China's Dominance As A Global Consumer And Producer Of Copper. [online] Washington : United States International Trade Commission. [Accessed 27 May 2013].

Info Mine Inc. (2009) Historical Copper Prices and Price Chart. [Watercolour on paper]. At: Vancouver [online]. Available from: http://www.infomine.com/ChartsAndData/GraphEngine.ashx?z=f&gf=110563.USD.lb&dr=max [Accessed 27 May 2013].

Info Mine Inc (2011) Copper LME Warehouse Level. [Watercolour on paper]. At: Vancouver [online]. Available from: http://www.infomine.com/ChartsAndData/GraphEngine.ashx?z=f&gf=110551.t.&df=20121101&dt=20130531 [Accessed 28 May 2013].

UBS Estimates (2012) Copper demand (refined) by region, 2012E. [Watercolour on paper]. At: New York [online]. Available from: https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgXHGMgbIsZ_oX2sPjJjgxp16Q03LJqgW_Qws48MwfjIuV7Jg6ffI_ONQBMTwkpFe8e5s0jABtxBqxJTiwig9wCAx_DhkxU8PNFDtncFhkKezDmf0ssisRdkhfv3Z-si7bUvAu7WVuQbSYp/s1600/Copper+Demand.png [Accessed 27 May 2013].