# Supply, demand and the cost curve Commodity prices come from a steep, cyclical demand curve meeting a supply curve that is flat while there is spare capacity and a wall once there is not. You will see how demand follows development and technology, how the industry cost curve sets price floors and rents, why lead times, by-products and harvests make supply slow to respond, and when cartels and governments can bend the outcome. Source page: https://www.materialinsights.org/learn/commodities/supply-demand-costs/ [Understanding Commodities](https://www.materialinsights.org/learn/commodities/) / Module 3 ## Supply, demand and the cost curve Commodity prices come from a steep, cyclical demand curve meeting a supply curve that is flat while there is spare capacity and a wall once there is not. You will see how demand follows development and technology, how the industry cost curve sets price floors and rents, why lead times, by-products and harvests make supply slow to respond, and when cartels and governments can bend the outcome. 5 parts · 19 sections · about 45 minutes · 0 of 5 parts read ### By the end you will be able to - Explain why commodity demand is derived, why it swings harder than GDP, and how intensity of use rises and falls with development, using China as the test case. - Distinguish short-run from long-run income and price elasticities, and explain why substitution is usually driven by technology and is rarely reversed. - Read an industry cost curve using C1, C3 and all-in costs, identify the marginal producer, and say what kinds of rent other producers earn. - Explain why short-run supply is inelastic, how lead times create investment cycles, and why by-product supply ignores its own price. - Describe how weather, feed, biofuel policy and stocks shape farm commodity supply and prices. - Judge whether a producer, cartel or government has market power, using concentration, elasticities and the cartel revenue formula. ### Contents 1. [Part 1 Demand: derived, cyclical and tied to development](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p1/) Commodity demand is unusual in three ways. Nobody wants the material for itself, so demand is derived from the goods it makes. It swings harder than the economy over the business cycle. And over decades it follows a country's stage of development, rising while the country builds and flattening once it turns to services. China is the great test case. - Demand is derived, so buyers barely notice the price - Intensity of use rises and then falls as countries develop - China's urbanisation produced the biggest demand surge in history - Income moves demand fast; price moves it slowly 2. [Part 2 Substitution, technology, and demand for food, feed and fuel](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p2/) Demand curves shift when the material content of products changes. Economists long credited relative prices; the evidence points more often to technology. This part sets out both views, applies them to live switches such as aluminium for copper and iron phosphate batteries, then turns to farm commodities, whose demand is shaped by diets, livestock and fuel policy. - Substitution is driven more by technology than by price - Today's switches: aluminium for copper, iron phosphate for cobalt - Food, feed and fuel: demand set by diets and policy 3. [Part 3 Supply: the cost curve, the marginal producer and rent](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p3/) On the supply side the central tool is the industry cost curve: every mine or field ranked from cheapest to dearest. Read correctly, it shows where prices tend, who suffers in a glut and who earns the windfall in a boom. Read naively, it misleads, because costs move with prices and producers often keep running at a loss. - The cost curve ranks every producer, and the measure of cost matters - The marginal producer anchors the price, but the floor is soft - Economic rent is the surplus a low-cost producer earns - Why output keeps flowing when prices fall below cost 4. [Part 4 Inelastic supply: spikes, lead times, by-products and harvests](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p4/) Short-run supply is fixed by the capacity already built, so a demand surge meets a near-vertical supply curve and the price does the adjusting. How long that lasts depends on lead times: a decade for mines, a season for annual crops. Two kinds of supply barely respond even then: by-product metals, and harvests in a year when stocks are low. - Steep demand meets vertical supply, and prices spike - Long lead times turn price signals into investment cycles - By-products are supplied whatever their own price does - Farm supply answers within a season, but weather rules and stocks buffer 5. [Part 5 Market structure: competition, cartels and the state](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p5/) Most commodity markets are competitive in the sense that matters: no seller has both the ability and the incentive to hold the price up for long. Some are not, and cartels and governments have often tried. This part covers how to judge market power, the arithmetic of cartels, why buffer stocks failed, and how state producers change supply. - Market power needs both the ability and the incentive - Cartel arithmetic explains why most commodity cartels fail - Buffer stocks can smooth prices only around the right price - State producers and export controls change the supply curve 6. [Wrap-up Key terms, try it in the table, final quiz, sources](https://www.materialinsights.org/learn/commodities/supply-demand-costs/review/) [Start: Part 1, Demand: derived, cyclical and tied to development →](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p1/) ## Other sections - [Demand: derived, cyclical and tied to development](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p1/index.md) - [Substitution, technology, and demand for food, feed and fuel](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p2/index.md) - [Supply: the cost curve, the marginal producer and rent](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p3/index.md) - [Inelastic supply: spikes, lead times, by-products and harvests](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p4/index.md) - [Market structure: competition, cartels and the state](https://www.materialinsights.org/learn/commodities/supply-demand-costs/p5/index.md) - [Key terms, quiz and sources](https://www.materialinsights.org/learn/commodities/supply-demand-costs/review/index.md)