Question

An article in the July 5, 2015 Denver Post reported on the bankruptcy filing of Molycorp, a Greenwood Village-based mining company. Molycorp specialized in the production of rare earths like lanthanum and cerium. The Denver Post article states “In 2009, China, which produced 97% of the world’s rare earths, imposed export restrictions.” As you might expect, China’s action caused a spike in the world price of rare earths. Recently, China lifted its export restrictions in response to a World Trade Organization ruling. Use the supply and demand model to analyze how the end of China’s export restrictions affected the market for rare earths in the United States. You should evaluate the effects on the overall economy and on groups within the economy who are made better or worse off. Specifically, how did China’s recent action affect Molycorp? Your answer must include both a graph and a written explanation.

Answer 1

Given that there is a bankruptcy filing of Molycorp that specialized in the production of rare earths. China used to supply most of this elements and when it imposed export restrictions, we might expect a reduction in the world price of rare earths. Because the supply curve shifts to the left, there is an increase in the price of rare earths and a reduction in quantity supplied and demanded. That is why we see that China’s action caused a spike in the world price of rare earths.

When China lifted its export restrictions the supply must have increased and the this has caused the price to fall and quantity to rise. Hence the end of China’s export restrictions would have increased the quantity supplied and reduced the price in the market for rare earths in the United States. China’s earlier action would have increased Molycorp profits and its recent action would have reduced the profits of Molycorp. This is because the overall price is now reduced and because the supply is almost inelastic, a shift to the right with the recent decision would have reduced the price more than the increase in the quantity so that revenue has fallen for Molycorp.