Question

Platinum is a rare metal. Its 2 biggest uses are in jewelry and in the automotive industry, where it is used in the manufacture of automobile engines.

From August 2016 to June 2019, global platinum prices decreased by 30%.

From July 2019 to October 2019, global platinum prices increased by 22%.

Assuming that the market for platinum is highly competitive, use supply and demand concepts to explain whether the following supports an increase in the price of platinum or a decrease in the price of platinum. Explain why.

1. Millennials (individuals born between 1980 -2000) prefer platinum because they like its finish and ability to hold intricate jewelry designs.
2. The price of gold increased by 50%
3. Platinum mines in South Africa, which supplies 70% of the world’s platinum, were affected by a long strike by miners.
4. Lower demand for diesel engines which use platinum
5. South Africa places a special tax of 10% per pound of platinum which is paid by sellers of platinum.

Answer 1

Let us explain the effect of each situation one by one:

i. If millenials prefer more platinum, this is going to raise the demand for it. Accodingly, the demand curve for platinum will move forward and cut the supply curve at higher price and quantity. Thus, prices will incraese.

ii. Gold is considered as close substitute of platinum. Hence, the increase in price of gold is going to shift the demand to platinum. Thus, the demand curve for platinum will shift forward and cut the supply curve at higher price and quantity.

iii. The strike is going to effect the supply side of the platinum market. The strike is going to shift the supply curve backwards and hence the supply curve will cut the demand curve at higher price and lower quantity.

iv. Lower demand for diesel engines which use platinum is going to shift the demand curve of platinum backwards and hence cutting the supply curve at lower price and lower quantity.

v. If the tax is paid by sellers of platinum, this means that the price rises for them and hence they will suply lesser quantity at the existing prices because they have to pay the taxes as well. This will shift the supply curve backwards and will result in the equilibrium at lower prices and lower quantity.