Quick questions on Demand, supply, equilibrium and elasticity (QCE Economics Unit 1)

The law of demand states that, holding other factors constant, the quantity demanded of a good rises when the price falls (and vice versa). The demand curve slopes downward.

Demand shifts (rather than moves along) when one of these factors changes:

The law of supply states that, holding other factors constant, the quantity supplied rises when the price rises. The supply curve slopes upward.

Equilibrium is the price and quantity where demand equals supply. Diagrammatically, equilibrium is the intersection of the demand and supply curves.

Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a change in price.

Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price.

Iron ore at $80 per tonne; Australia exports around 900 million tonnes per year.

Chinese stimulus spending raises construction activity, increasing demand for steel and therefore iron ore. The demand curve shifts right.

Price rises to $130; quantity rises slightly (supply is relatively inelastic in the short run because mine capacity is fixed).

Discovery of new deposits and capacity expansion at major Pilbara mines (Rio Tinto, BHP, Fortescue) shifts the supply curve right. Price falls; quantity rises.

When demand is inelastic and supply is elastic, the consumer bears most of the tax burden (e.g. cigarettes). When demand is elastic and supply is inelastic, the producer bears most (e.g.

Agricultural demand and supply are both relatively inelastic. Bumper harvests can sharply lower prices and farm income; crop failures sharply raise them. Stabilisation policies (price floors, marketing boards) address this volatility.

Australia's exports of iron ore have relatively inelastic supply in the short run (mines cannot expand quickly) but elastic supply in the long run (new mines can be developed).