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.