Rare+Earth+metal+demand+is+unstoppable+by+Ji+Hun+Yang

= TITLE OF EXTRACT: =

Of metals and market forces
= = =Is China’s grip on essential minerals loosening? = = =

= SOURCE: = []

**DATE EXTRACT WAS WRITTEN: **

 Feb 4th 2012 **DATE CURRENT EVENT WAS WRITTEN: **

 Feb 23rd 2012

**EXPLANATION OF THE ECONOMIC THEORY RELATED TO THE ARTICLE: ** Due to the discovery of many new technologies, rare earth metal, a series of metals/elements which are used in different industries. Of all the nations China is the biggest supplier of rare earth metals. It produces over 97% of the world’s rare earth metal supply. The **monopolistic** power that China exercises on the market caused a number of issues. Rare earth metals have very few **substitutes.** Therefore the **demands** for the rare metals are extremely **inelastic** (**Price Elasticity of Demand** of less than 1). In other words, if China, by exercising its domination over the rare earth metal market, decreases the **supply** to increase the price, China would easily increase its revenue. Moreover, by gaining control over a crucial market China can gain right to raise its strongest ever voices to the world. China asserts that the few reasons behind the cut of supply in rare earth metals are that the rare earth metal has been overly underpriced and that the rare earth metal causes environmental issues, causing **negative externalities** **of production**. They also argue the importance of **sustainable development**, that producing rare earth metals without any restrictions will affect the future generations—in other words, some portions of the resources should be reserved for the future. In the backlash of the decreased supply of the rare earth metals, some countries announced that they will join in the rare earth metal market. Even though in **Short Run** countries might have to depend on China’s supply of rare earth metals, in **Long Run**, the market will be reformed into Oligopolistic structure. **VOCABULARY TERMS AND DEFINITIONS: ** **Monopoly**: A type of market structure in which only one firm exists and it can control the supply or trade of goods and service in the market **Price Elasticity of Demand**: Measure of how much the demand for a product changes when there is a change in the price **Demand**: The quantity of a good or service that consumers are willing and able to purchase at a given time period **Supply**: The quantity of a good or service that producers are willing and able to purchase at a given time period **Substitute**: A good that can be produced instead of the original good <span style="display: block; font-family: Arial,sans-serif; font-size: 11pt; text-align: left;">**Negative Externalities of Production**: a cost or benefit not transmitted through prices that is incurred by a party who did not agree to the action causing the cost or benefit. <span style="display: block; font-family: Arial,sans-serif; font-size: 11pt; text-align: left;">**Sustainable Developmen**t: Economic development that meets the needs of the present without compromising the ability of future generations to meet their own needs. <span style="display: block; font-family: Arial,sans-serif; font-size: 11pt; text-align: left;">**Short Run**: A period of time in which at least on factor of production is fixed <span style="display: block; font-family: Arial,sans-serif; font-size: 11pt; text-align: left;">**Long Run**: A period of time in which all of the factor of production are variables

**<span style="background-color: white; font-family: Arial,sans-serif; font-size: 11pt;">DIAGRAMS: ** Figure 1  Figure 2 **<span style="background-color: white; font-family: Arial,sans-serif; font-size: 11pt;">Figure 3 ** Figure 4 Figure 5

**<span style="background-color: white; font-family: Arial,sans-serif; font-size: 11pt;">EVALUATION: ** <span style="color: #333333; font-family: Arial,sans-serif; font-size: 11pt;">China’s monopoly on the market has both pros and cons. As the graph at the above shows, the monopoly over the rare earth metal increases revenue. China can reduce the supply of the rare earth metal according to their needs. Since the demand for the rare earth metal is very inelastic, decrease in supply causes increase in revenue of the China (note figure 2). Moreover, since rare earth metal is a necessary resource for many industries’ survival, China can attain political dominance over many nations. <span style="color: #333333; font-family: Arial,sans-serif; font-size: 11pt;">However, monopoly also causes some problems. First, monopolist produces at the level of output where there is neither productive efficiency nor allocative efficiency. As the figure 1 at the above shows, monopolists produce goods at profit-maximizing point (MC = MR) in long run. Since the market is not allocatively efficient, the demands of the consumers are not fulfilled. The article implies that the consumers of the rare earth metals have been suffering due to the monopoly by stating that “ American and European officials cheered (The Economist, 3) when WTO ruled that China’s policies to restrict exports of several metals violated its WTO obligations.

<span style="color: #333333; font-family: Arial,sans-serif; font-size: 11pt;">China asserts that they had to cut the supply in order to recover the price of the rare earth metals (China argues that the price of rare earth metal is so low that they gain virtually no profit) and environmental reasons (negative externality of production). The benefits of decrease in supply are: first, as figure 3 shows, the negative externality of production can be removed by shifting the supply curve for the production of the rare earth metal to left. and second, as figure 2 shows, the underpriced rare metal can recover its price by decreasing the supply, hence China can earn more revenue. Moreover, as more amount of resources are reserved for the future, sustainable development can be achieved. <span style="color: #333333; font-family: Arial,sans-serif; font-size: 11pt;">Side effects of decreasing the supply are that because the increase in price of the rare earth metal causes the quantity to decrease, the firms that use the rare earth metal as resource to provide secondary products will not be able to provide as many products as before, as figure 4 shows.

<span style="color: #333333; font-family: Arial,sans-serif; font-size: 11pt;">According to the article because the price of the rare earth metal has increased so high, some countries that had the rare earth metal reservoirs but did not mine them began to enter the rare earth metal market. This shows that the rare earth metal market is not a perfect monopolistic market. Therefore, the market will eventually become an oligopolistic market (figure 5). Assuming that the producers do not collude each other, the price of the rare earth metal will be stabilized at certain point, and price competition might bring down the price of the rare earth metal. This will eventually be beneficial for the consumers.