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
•…