Recently, the demand for EVs has been at best stagnating and purchase intentions are cooling off. This has pushed down the demand and prices of battery minerals: thus far this year, battery-grade lithium prices fell by 60%; nickel, graphite, and cobalt, by 30%. So far, so good. But if we believe a Wall Street Journal report, the lower price of these inputs will bite back and, in turn, lead to lower prices and higher demand for EVs and battery materials, canceling the previous effects; the snake is biting its tail and will completely eat itself (“Biden’s Electric-Vehicle Push Hits a Speed Bump,” November 21). A typical blurb:
Milewski, Nickel 28’s CEO, said the steep fall in metal prices could also spark another phase of the boom-bust cycle. Falling prices can make EVs more affordable, which in turn could boost demand for batteries—and drive metal prices higher again.
“Low prices are a cure for low prices,” Milewski said.
This faulty reasoning is well-known to economists. Economic theory teaches us to distinguish between demand and quantity demanded, and similarly between supply and quantity supplied. Demand is the whole schedule (or curve) of quantities demanded at different prices. Supply is the whole schedule (or curve) of quantities supplied at different prices. A price determines the quantity demanded along a given demand curve and the quantity supplied along a given supply curve. Decreases or increases in demand or supply happen when other factors than prices change.
A few years ago, I wrote an EconLog post on the confusion exemplified in the quote above: “A Frequent Confusion and the Yo-Yo Economic Model” (January 29, 2018). It contains a supply-demand graph which, if you are not familiar with standard economics, might help you better understand. What I called the yo-yo model suggests that a price will automatically go up because it has gone down before; it’s a model with fuzzy concepts and fuzzy relations between them, like a blob which you can’t get a grip on.
With a correct supply and demand analysis, we can give a coherent, not blobby, explanation of what has presumably been happening. A lower demand (a shift of the whole demand curve—not a movement along the curve) has led to a lower demand for battery metals, whose prices have thus fallen. The falling prices of battery metals cannot boost demand for EVs (and battery metals) because it is precisely the fall (or expected fall) of the latter that has caused the prices of battery metals to fall. This would be like saying that an increase of demand causes a reduction of demand—a new version of pre-Socratic philosopher Parmenides’s claim that all motion and change are illusions.
The real-world issue we are dealing with is complicated by the fact that, observing the presumed reduction of demand (in EVs and battery metals), some suppliers (mining companies and manufacturers) have reduced their future supply by postponing investments. This means that not only are they responding to lower current demand and prices by reducing their current quantity supplied, but they are also reducing their future supply. Another Wall Street Journal story, “Are Americans Falling Out of Love With EVs?” (November 17), gives a more sensible, or less economic-less, view of the situation.
To summarize: If one does not have a clear idea of what economics calls a change in demand, that is, a shift up or down of the whole demand curve as opposed to a move along a given curve (and similarly for a change in supply as opposed to quantity supplied), he is likely to fall into egregious errors like thinking that a price reduction will necessarily be neutralized by a price increase. When one knows these distinctions, it becomes easy to see that if a price gets out of equilibrium, it will tend, ceteris paribus, to return to its equilibrium through changes in quantity demanded and quantity supplied; but if demand or supply changes, a new equilibrium is created which is not self-defeating.
READER COMMENTS
Thomas L Hutcheson
Dec 10 2023 at 10:23pm
It is sort of sad that a writer for WSJ should make such an elementary mistake. Now journalistically there may be a step (“hog corn cycle”) adjustment story that might be told.
Pierre Lemieux
Dec 11 2023 at 11:42am
Thomas: Perhaps you are right and such a story can be told. Its usefulness, however, crucially depends on not confusing motions along (supply or demand) curves and shifts of these curves. Repetitive, long-term stop-and-go’s are probably much more likely in politics, where they are spending other people’s money (forcibly taken) and prices are meddled with; I am reminded of my review of Michael Titlebaum’s Falling Behind, pp. 68-70.
Jose Pablo
Dec 11 2023 at 8:03pm
Journalists are paid based on their ability to sell newspapers, not by the quality of his/her economic reasoning.
If good economics doesn’t sell newspapers the journalists are not the ones to blame.
Journalist, I can get it, but I find it much more intriguing, the poor economic understanding of Nickel’s 28 CEO. After all CEOs “make” the economy.
So:
1.- Economics try to explain the behavior of economic agents.
2.- CEOs and the public in general (two relevant economic agents) don’t grasp the most basic economic concepts.
So, “agents” behave in a way that when analyzed and explained back to them, they don’t understand at all. It is totally alien to them.
And not only that. They scoff at the potential contribution of the people that have analyzed and codified their own behavior. Quoting Buffett (Warren): “if you have an economist on your payroll, you have one too many”
This whole “teaching birds how to fly” issue makes me think.
Pierre Lemieux
Dec 11 2023 at 11:58pm
José: There are things that one can rarely learn on the job, like theory. So I am not surprised to read Financial Times columnist Samuel Brittan say that “businessmen are paid to operate the system rather than understand or expound it” (Capitalism and the Permissive Society, Macmillan, 1973). (I agree that the expression “paid to operate the system” is not felicitous.) We must not flush the baby of education with the bathwater of ignorance.
Ahmed Fares
Dec 10 2023 at 10:29pm
[sort of off-topic]
Parmenides was right, and his is actually the correct description of reality.
This is because of continuous creation. It is the Islamic position as stated in the Qur’an, and is confirmed experientially by the ascension of the Sufi gnostics, who witness continuous creation with their own eyes. Here’s a good description of continuous creation by a Calvinist:
While it’s God’s custom to create things as they were before, there’s no guarantee that will happen.
robc
Dec 11 2023 at 9:31am
Continuous creation was also the basis for an episode of the twilight zone.
A couple accidently manage to stumble “backstage” where the next moment of time is being created. It explains things like your keys “missing” and then you find them where you originally thought they were. The elves, of whatever they were, screwed up and left them out of the scene.
In other words, BS.
Pierre Lemieux
Dec 11 2023 at 12:32pm
robc: What if somebody has an Apple Air Tag on his keyring and follows the signal backstage?
robc
Dec 11 2023 at 3:47pm
The airtag stops existing.
The next scene had an entirely new keyring with an entirely new airtag. Stuff didnt last long.
Pierre Lemieux
Dec 11 2023 at 11:26am
Ahmed: Interesting to see that pre-Socratic issues are not yet completely resolved.
Jose Pablo
Dec 11 2023 at 10:20pm
I do agree with Parmenides. Everything is just an illusion: friendship, love, homeland, loyalty, the memories and feelings that shape what we are, even God …
… all will be lost in time like tears in rain.
Pierre Lemieux
Dec 12 2023 at 11:12am
José: It’s an illusion compared to what? Or from which point of view? The “what” and the “point of view” is where we want to be or what we want to pierce. (On these questions, alas, economic methods can’t help us. (The questions do comfort methodological individualism and ontology, though: no nirvana or Theillardian communion is interesting if *I* am not there and conscious to be there.)
Robert EV
Dec 18 2023 at 2:46pm
If you’re going to philosophically eliminate one idea (continuity) to see what that entails, then I don’t see why you don’t also philosophically eliminate other ideas (e.g. creation and destruction) to see what that entails.
And there are philosophies that I am aware of (and probably others that I am not aware of) that address this later idea. Creation as a human conceit projected onto the universe where what is actually happening is a continual rehashing of what already exists.
I’m not saying I buy either, because I do think emergent properties exist. I’m just saying that when actually philosophizing about the state of the universe, why not occasionally theory-check with theoretical physicists, and reality-check with experimental physicists, instead of just philosophy-checking with other philosophers.
Richard Fritze
Dec 11 2023 at 12:14pm
Interesting article and commentary this morning. Thanks!
David Seltzer
Dec 11 2023 at 3:55pm
“To summarize: If one does not have a clear idea of what economics calls a change in demand, that is, a shift up or down of the whole demand curve as opposed to a move along a given curve (and similarly for a change in supply as opposed to quantity supplied), he is likely to fall into egregious errors like thinking that a price reduction will necessarily be neutralized by a price increase. When one knows these distinctions, it becomes easy to see that if a price gets out of equilibrium, it will tend, ceteris paribus, to return to its equilibrium through changes in quantity demanded and quantity supplied; but if demand or supply changes, a new equilibrium is created which is not self-defeating.” This is the clearest explanation I’ve read. Cemented understanding the difference between demand and quantity demanded as well as supply and quantity supplied. Thanks!
Pierre Lemieux
Dec 11 2023 at 10:38pm
Thanks to you, David, for reading EconLog and participating!
diz
Dec 21 2023 at 5:34pm
“low prices are the cure for low prices” is a very common axiom in the oil and gas business. There may be a few aspects of the industry that make it somewhat valid. One, demand for oil and gas is relatively price inelastic. Two, if new investment stops supply declines. Oil and gas wells deplete over time. The return on drilling an oil well goes down with lower prices, so rigs get laid up and supply begins to decline – so in a way low prices do cure low prices. (and vice-versa).
Not as familiar with metals but I imagine the mini side has some aspects that are similar. I would guess mines tend to deplete and without new investment supply will decline, though perhaps not as inevitably and quickly as with oil wells.
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