Question

A rare earth element known as dysprosium has unique magnetic properties that make it a mandatory input in the manufacturing of wind turbines. All current mines for dysprosium have been exhausted. The last known location for this element is in a mountain range in China. The input costs associated with mining this remaining source of dysprosium are expected to be significantly higher than the input costs of previous mining operations. Using the supply and demand model, explain the changes you expect to happen (1) in the market for dysprosium and (2) the market for wind turbines.

Answer 1

The supply and demand model determines the price of a particular product in the market, it is the relationship between price at which the supplier wants to sell the product and the price at which the consumers are willing to buy the product.

The market for dysprosium would have fewer suppliers and more demand as it is mandatory in a windmill, thus the price of dysprosium would increase and the demand would fall as not many people can afford the product, only those who have the capital would buy it. Thus market would have selective suppliers unless other site is discovered, because of the higher cost, demand would fall.

The market for wind turbines would be impacted because of this rare element, suppliers of wind turbines would be few and it would lead to increase in cost of wind turbines, the demand would fall and the supply would also be impacted. It also depends on whether renewable energy is being promoted by the government, there are alternative sources as well of renewable energy. So if wind turbines turn out to be expensive, people can switch for other means. However if this is the cheapest of the lot, then demand could increase. Thus in this context, supply will be less and higher cost will lead to decrease in demand.