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Suppy Demand

Last month, concerns that political infighting in Moscow might choke future supplies drove the price of palladium to nearly $1,000 an ounce. Although there is less than an ounce of palladium in most vehicles -- it is used inside the catalytic converter -- that kind of price surge means palladium suddenly is becoming a big-ticket item for auto companies. Car makers brought much of this on themselves. In the mid-1990s, they agreed to accelerate their adoption of tighter national emission standards as part of a deal to head off separate state-by-state rules, which would have played havoc with manufacturing and distribution. Palladium looked like the best solution, since it began cleaning exhaust sooner after starting up than platinum, then the dominant metal in catalytic converters. Plus, the price for little-used palladium hadn't gone above $200 a ounce in more than a decade, while platinum had jumped above $400. Following this decision, palladium prices jumped in the late 90's , but remained below $400 an ounce until this year....However many automakers are projected to have a big increase in palladium consumption in 2000, as they began to roll out models to meet the tighter national emission rules as regulators turn their focus to explosively popular trucks and SUVs, which have been subject to more-lenient rules. Palladium turns out to be particularly good at cleaning their exhaust. Although there is now a huge effort under way at many companies to find ways to use less palladium, changing car designs in that way will take several years.

3a) Draw a supply - demand diagram of the market for palladium which illustrates the price jump from $400 to $1000 per ounce that occurred between the 1999 model year and the start of the 2000 model year. Label your axes clearly and label all supply and demand lines in your diagram. Explain any shift in any supply or demand line that you included in your diagram. (Read the quote carefully for reasons behind the S or D shifts)

b)Based on information in the above article is the demand for palladium elastic or inelastic? Explain your answer. i.e. What about palladium and its use in automobile manufacturing creates its high or its low elasticity of demand ?

Solution Summary

Is the demand for palladium elastic or inelastic? Explain your answer. i.e. What about palladium and its use in automobile manufacturing creates its high or its low elasticity of demand ?

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