This week, we learned that the interaction of supply and demand determines prices and output levels in markets. Prices and output levels change when either the demand curve or the supply curve shifts. Sometimes price and output both increase and decrease. Sometimes one increases while the other decreases.
Consider a situation where the price of a good rises when output increases. For example, lithium is used in rechargeable batteries for computers, phones, other electronic goods, and even certain cars. Demand for lithium was low as recently as the early 2000s. Since then, both the price of lithium and the production of lithium have more than doubled.
Start your discussion by responding to these questions:
What could explain the simultaneous increases in the price of lithium and the production of lithium? Use supply and demand curves to explain your answer.
Hint: Price and equilibrium quantity have both increased. Would a shift in the demand curve or a shift in the supply curve lead to this result?
The shift in the demand curve from D1 to D2 has caused the price to increase from P1 to P2. The equilibrium quantity has also increased from Q1 to Q2.
The increase in the price of lithium and the production of lithium is a good example of how demand and supply curves can be used to explain changes in prices and quantities. It also shows how changes in demand can lead to changes in supply.