BEA111 Economics Essay: Supply and Demand Model for Iron Ore Prices

This economics essay analyzes the recent drop in iron ore prices using the supply and demand model, based on a news article from ABC News. The article attributes the price decline to a supply and demand gap caused by reduced demand in China due to higher production costs of lower-grade coal. The essay explains the supply and demand model, illustrating how shifts in either supply or demand affect equilibrium price and quantity. It interprets the events described in the article within this framework, showing how decreased demand in China shifts the demand curve, leading to lower prices. The essay concludes by suggesting that the US could potentially shift the demand curve upward to counter the price decline.

Running head: ECONOMICS ASSIGNMENT
Economics assignment
Name of the student:
Name of the University:
Author note

1ECONOMICS ASSIGNMENT
Brief summary of the article:
The selected news article published in the ABC news is one of the newspaper
publication that deals with the recent price tumbling of the iron ore. According to the selected
article, recent price fall of the US iron ore export to the Chinese market has been christened
due to the supply and demand gap germinated through the fall in the demand of the iron ore
in China (Lannin 2018). Selected article portray that higher production cost of lower grade
coal is one of the main reason that has driven the demand fall. To conclude the article argues
according to the forecast that the price of the US iron ore is set to touch record low $51.50 for
each tone by the end of the 2018.
Overview of the demand and supply model:
Supply and demand model is one of the basic economic models that helps to
determine the price and quantity of goods and services (Becker 2017). From the figure 1, it
can be seen that demand curve is represented by D and supply curve is showcased by S.
Initial equilibrium occurs at E0 where the respective demand and supply is Q0 and P0.
Considering that if supply change, then demand will remain fixed and vis-à-vis, then either
with rise in demand or fall in supply, the demand curve will shift upward or the supply curve
will shift downward respectively, leading to new equilibrium E2 or E3, where the respective
price will be P2 and P3 (Friedman 2017).

2ECONOMICS ASSIGNMENT
D
2
D
1
E4
E3
P1
P0
P2
P
Q
D
0
S1
S0
S2
E1
E0
E2
Q
2
Q
0
Q
1
D
2
D
1
E1
E2
P1
P0
P2
P
Q
D
0
S
E0
Q
2
Q
0
Q
1
Figure 1: Demand and Supply framework
Source: (Created by Author)
According to the same diagram, if there is fall in demand or rise in supply, then it will
lead to new equilibrium E4 and E1 respectively, where the new price and demand will be P2
and P1 respectively with demand Q1 (Schwager and Etzkorn 2017). Thus, considering the
demand supply framework, price and demand of the goods and services can easily be
determined.
Economic interpretation of the events in the article:
Figure 2: interpretation of the selected article with supply and demand model
Source: (Created by Author)

3ECONOMICS ASSIGNMENT
According to the selected article there is severe demand crunch in the Chinese market
for the US iron ore (Lennin 2018). Considering the figure 2, it can be seen that the initial
equilibrium has occurred has E0, where the rice is P0 and the quantity demanded is Q0. Now
there has been fall short in iron ore demand in the Chinese market and applying this in the
supply demand framework it can be seen that this reduced demand has shifted the demand
curve to the right depicted by D1 in the figure 2 (Ehrenberg and Smith 2016). With reduced
demand price will be lower at P2 and the new equilibrium will be E1. However, if US can
gauge the present situation, then it can shift the demand curve upward from the initial E0
causing a new equilibrium E2, where the price will be P1 and Q2 will be new demand.

4ECONOMICS ASSIGNMENT
Reference:
Becker, G.S., 2017. Economic theory. Routledge.
Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy.
Routledge.
Friedman, M., 2017. Quantity theory of money. The New Palgrave Dictionary of Economics,
pp.1-31.
Lannin, S. (2018). US, China trade war set to send iron ore prices tumbling. [online] ABC
News. Available at: http://www.abc.net.au/news/2018-04-02/trade-war-set-to-send-iron-ore-
prices-tumbling/9610888?section=business [Accessed 3 Apr. 2018].
Schwager, J.D. and Etzkorn, M., 2017. Supply‐Demand Analysis: Basic Economic Theory. A
Complete Guide to the Futures Market: Technical Analysis, Trading Systems, Fundamental
Analysis, Options, Spreads, and Trading Principles, Second Edition, pp.359-371.