Supply, demand and the cost curve: Key terms, quiz and sources

Understanding Commodities / Module 3: Supply, demand and the cost curve Wrap-up

Supply, demand and the cost curve: review

Key terms

Derived demand: Demand for a raw material that exists only because of demand for the goods made with it.
Intensity of use: Consumption of a material per unit of GDP; it tends to rise and then fall as an economy develops.
Income elasticity of demand: The percentage change in demand caused by a 1 per cent rise in income or GDP.
Price elasticity: The percentage change in quantity demanded or supplied caused by a 1 per cent change in price; low in the short run, higher in the long run.
Material substitution: Replacing one material with another in a product, driven by relative prices, new technology, regulation or tastes, and rarely reversed.
Engel's law: As income rises, households spend a falling share of it on basic food, so staple demand grows more slowly than income.
Comparative cost curve: All producers ranked from lowest to highest unit cost against their capacity, used as an approximation of the industry supply curve.
C1 cash cost: Direct operating cost per unit, usually net of by-product credits; close to average variable cost.
C3 or full cost: C1 plus depreciation, interest and indirect costs such as overheads, exploration and royalties; close to average total cost.
All-in sustaining cost: A gold-industry measure, proposed in 2013, that adds sustaining capital, exploration and corporate costs to cash costs.
Marginal producer: The highest-cost producer still needed to meet demand, whose costs anchor the market price in a competitive market.
Economic rent: Income above what is needed to keep a producer operating, which could be taxed away without changing its behaviour.
Quasi-rent: The short-run return that existing mines earn because their capital is sunk while new mines must cover full cost.
Investment cycle: The sequence in which high prices trigger investment that arrives years later, often all at once, pushing prices down.
Main product, co-product, by-product: Joint products ranked by how much their price drives ore output: all of it, a share of it, or none of it.
Companionality: The share of a metal's primary production recovered as a companion of one or more host metals.
Stocks-to-use ratio: Ending stocks divided by annual use; a low ratio means supply shocks hit prices hard.
Herfindahl-Hirschman index: The sum of squared market shares of all firms, from 0 to 10,000, used to gauge concentration.
Market power: The ability and the incentive to raise the market price by restricting output.
Buffer stock: A stock held by an agency that buys when prices are low and sells when they are high to keep prices in a band.

Try it in the table

Open Copper. Compare the September 2026 price of $14,474 a tonne with the 2013 cash costs in this module, $3,600 for a typical mine and $5,300 at the 90th percentile. Which kinds of rent is a typical mine earning now, and which will shrink as new capacity arrives?
Open Tellurium, Selenium and Indium and note each host and its companionality. Then open Copper and Zinc. If copper mine output stalls for two years while solar demand for tellurium doubles, what happens to tellurium's price and output, and why?
Open Iron ore and Steel. With China making 1.01 billion tonnes of steel in 2024 and its demand falling, use the iron ore price range and production shares to say which producers are likely to be marginal, and where that puts the price floor.
Open Wheat and Maize and read their stocks lenses. Compare the world stocks-to-use ratios with the 1972 fall in US wheat stocks from 23.5 to under 7 million tonnes. Which grain looks more exposed to a weather shock?
Open Cobalt and Rare earths. Take each dominant producer's share from the production lens as the cartel share in the cartel formula, then list what outside supply could respond and how fast. Which export restriction is more likely to keep raising the seller's revenue?
Open Potash and Tin and read their cycles lenses. Both markets have a history of producer or government price management. What do their price ranges since 2016 suggest about the limits of that control?

Final quiz

Under the intensity-of-use hypothesis, what is the long-run income elasticity of metal demand?

Building infrastructure makes demand grow faster than income on the rising limb of the inverted U; the shift to services makes it grow more slowly on the falling limb.

According to Humphreys, China's share of world copper consumption rose from about 11 per cent in 1998 to roughly what share in 2013?

Humphreys' table shows China at 11 per cent of world copper use in 1998, 28 per cent in 2008 and 47 per cent in 2013, driven by exports, investment and urbanisation.

In Tilton and Guzmán's light-truck example, steel rises from $1,000 to $2,000 a tonne while aluminium stays at $2,500. What happens to the firm's demand for aluminium?

The cheaper mix shifts toward aluminium, but the higher truck cost may cut output; the net effect on aluminium depends on which force is stronger.

Which cost measure, applied to existing and potential mines, best approximates the long-run supply curve?

In the long run all costs are variable, so the relevant measure is average total cost, approximated by C3, and the curve must include mines not yet built.

In 2013 a typical copper mine had cash costs of about $3,600 a tonne and the 90th-percentile mine about $5,300. If the price equals the 90th-percentile cost, what is the typical mine's rent per tonne?

Rent per tonne for an operating mine is price minus average variable cost: $5,300 minus $3,600, about $1,700.

Humphreys found that the copper price upturn of 1987 accelerated world mine production in which year?

The lag from price signal to new output was about eight years, and the same lag explains why the 2004 upturn showed up as output growth only in 2012 and 2013.

Why is crop price volatility usually less damaging to total farm revenue than metal price volatility is to miners?

Tilton and Guzmán explain that weather-driven harvest shortfalls raise prices and partly offset lost volume, while recessions cut both metal prices and sales.

What do Radetzki and Wårell see as the main source of OPEC's long-run influence on oil prices?

They find OPEC quotas shallow and often breached, and argue that underinvestment by state oil industries and unilateral Saudi moves mattered far more than collective action.

Next module: Reserves, stocks and depletion →

Sources for this module

Tilton, J.E. & Guzmán, J.I. (2016). Mineral Economics and Policy. RFF Press / Routledge. · pdf pp. 14, 30-56, 62-71, 76-77, 86-91, 93, 99-104, 112-114, 132-136, 174, 178-195
Radetzki, M. & Wårell, L. (2021). A Handbook of Primary Commodities in the Global Economy, 3rd ed. Cambridge University Press. · pdf pp. 22, 31, 41-42, 85, 102-111, 120-121, 129-139, 151, 180-181, 216-236, 243-252, 274-276
Humphreys, D. (2015). The Remaking of the Mining Industry. Palgrave Macmillan. · pdf pp. 26-27, 51-73, 105-110, 114-115, 119-120, 146-150, 181-182, 228-230
Nassar, N.T., Graedel, T.E. & Harper, E.M. (2015). By-product metals are technologically essential but have problematic supply. Science Advances 1(3): e1400180. web ↗ · pdf pp. 1-3
Smil, V. (2016). Still the Iron Age: Iron and Steel in the Modern World. Butterworth-Heinemann. · pdf pp. 203, 207, 230
Conway, E. (2023). Material World: A Substantial Story of Our Past and Future. W.H. Allen. · pdf pp. 140, 197, 311-312
Scheyder, E. (2024). The War Below: Lithium, Copper, and the Global Battle to Power Our Lives. Atria. · pdf pp. 20, 239
Yergin, D. (1991). The Prize: The Epic Quest for Oil, Money, and Power. Simon & Schuster. · pdf pp. 1049, 1062-1063, 1081
Pitron, G. (2020). The Rare Metals War. Scribe. · pdf pp. 73-76
Morgan, D. (1979). Merchants of Grain. Viking. · pdf pp. 207, 213, 219-222, 228, 231
Geman, H. (2005). Commodities and Commodity Derivatives. Wiley. · pdf pp. 154-155, 160-161
Tilton, J.E. (2003). On Borrowed Time? Assessing the Threat of Mineral Depletion. RFF Press. · pdf p. 58
U.S. Geological Survey (2026). Mineral Commodity Summaries 2026. web ↗ · Cobalt; Lithium; front matter, significant events in 2025
U.S. Department of Agriculture (2026). World Agricultural Supply and Demand Estimates, October 2026 (WASDE-676). web ↗ · World and U.S. supply and use for grains; U.S. wheat; U.S. feed grains and corn