ECONOMICS COMMENTARY – 1
Recently, demand for Aluminium has increased (data mentioned in article). Demand is the various quantities of a good a consumer is willing and able to buy at different price levels during a particular time period. The supply of Aluminium is steadily increasing, but the demand is likely to overtake supply, which is the various quantities of a good a producer is willing and able to produce at different price levels during a particular time period.
This surge in demand will lead to scarcity of aluminium and a rise in prices. The increase in demand is shown by the rightward shift of the demand curve. The rise in price is indicated as well.
Derived demand occurs when demand for one good is dependent on another good. The demand for aluminium is mainly derived from the automobile, airplane and packaging industries. All these contribute to the demand for aluminium. If the demand for cars increases, the demand of aluminium will also increase.
Recently, there has been a fall in demand for aluminium in China, which contributes to 40% of the world’s aluminium demand. Because of this slightly lower demand, currently prices fell temporarily. Another factor which led to this decrease in price was the glut of stock.
According to the law of demand, as price increases, quantity demanded decreases while all other factors remain unchanged. Demand for aluminium is price inelastic, as it is a primary commodity and countless industries are dependent on it for their raw materials.
Thus, a large increase in price from P0 to P1 leads to a less than proportionate decrease in quantity demanded from Q0 to Q1.
This leads to exploration in the markets for substitutes of aluminium. At the moment there are no close substitutes or substances which have similar properties that can be used in the place of aluminum (Cross-price inelasticity). But the plastics industry is steadily advancing. A breakthrough in plastic technology can lead to...
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