Aluminum market supply Essay

Submitted By hongruizl
Words: 2053
Pages: 9

Aluminum
 Industry
 in
 1994:
 
Building
 the
 Short
 Run
 Supply
 Curve
Managerial
 Economics
Alp
 Atakan

This
 material
 is
 for
 the
 exclusive
 use
 in
 MGEC
 classes
 at
 Koc
 University.
 No
 other
 use
 is
 allowed
 without
 my
 
 permission.
 

1

Trading Aluminum Ingot on the LME:
An Illustration


During
 a
 typical
 trading
 period
 in
 the
 “ring”
 on
 the
 London
 Metal
 Exchange
 (LME),
 
suppose
 that
 there
 are
 6
 potenRal
 buyers
 of
 aluminum
 contracts
 and
 6
 potenRal
 sellers
 
of
 aluminum
 contracts
 (on
 the
 LME,
 each
 contract
 contains
 25
 tons
 of
 aluminum),
 with
 
the
 following
 characterisRcs:

Poten@al
Buyer
#1
#2
#3
#4
#5
#6





Highest
 price
buyer
 is
 willing
to
 pay
 (“B”)
($
 per
 ton)
$
 
 
 
 
 
 
1,600
$
 
 
 
 
 
 
1,500
$
 
 
 
 
 
 
1,300
$
 
 
 
 
 
 
1,200
$
 
 
 
 
 
 
1,100
1,000
$
 
 
 
 
 
 

Poten@al
Seller
#1
#2
#3
#4
#5
#6

Lowest
 price
seller
 is
 willing
to
 accept
 (“C”)
($
 per
 ton)
$
 
 7
 00

 
 
 
 
$
 
 8
 00

 
 
 
 
$
 
 9
 00

 
 
 
 
$
 
 
 
 
 
 
1,100
$
 
 
 
 
 
 
1,200
1,300
$
 
 
 
 
 
 

A
 buyer
 only
 knows
 his/her
 own
 “B”;
 a
 seller
 only
 knows
 his/her
 own
 “C”
Buyers
 would
 like
 “buy
 low.”
 Sellers
 would
 like
 to
 “sell
 high.”
What
 transac@ons
 will
 take
 place?
 At
 what
 price?
2

What Does Microeconomics Predict About the Number of Trades
and the Prices at which Trades Take Place?
$
 per
 ton

$
 per
 ton

1700

1700

1600

1600

1500

1500

1400
1300

Poten@al
 sellers
 
in
 “merit
 order”

Poten@al
 buyers
in
 “merit
 order”

1400
1300

700

700

600

600

300
200
100
0

Poten&al
 seller
 #2

400

Poten&al
 seller
 #1

500

1

2

3
4
5
Quan&ty
 (contracts)

500
400
300
200
100

6

0

1

2
3
4
Quan&ty
 (contracts)

Poten&al
 buyer
 #6

800

Poten&al
 buyer
 #5

800

Poten&al
 buyer
 #4

900

Poten&al
 buyer
 #3

900

Poten&al
 buyer
 #2

1000

Poten&al
 buyer
 #1

1000

Poten&al
 seller
 #6

1100

Poten&al
 seller
 #5

1100

Poten&al
 seller
 #4

1200

Poten&al
 seller
 #3

1200

5

3

6

Price
 ($
 per
 ton)

Trading Aluminum Ingots on the LME:
Theoretical Prediction
1700



1600

Equilibrium
 quanRty:
 4
 
contracts
 will
 be
 traded



Equilibrium
 price:
 between
 
$1,100
 and
 $1,200
 per
 ton

1500

Supply
 
Curve

1400
1300
1200
1100

Demand
 
Curve
• What
 will
 actually
 happen
 in
 the
 
trading
 pit?
 

1000
900
800



700
600




500
400



300
200



100
0
0

1

2

3

4

5

Quan&ty
 (contracts)

6

Remember:
 in
 the
 pit,
 no
 one
 
knows
 these
 curves!
Freewheeling
 negoRaRon!
PotenRal
 buyers
 call
 out
 prices
 
at
 which
 they
 are
 willing
 to
 buy
PotenRal
 sellers
 call
 out
 
 prices
 
at
 which
 they
 are
 willing
 to
 sell.
Trade
 prices
 are
 posted
 
publicly

7

4

Aluminum Smelting is a Perfectly Competitive Market