HOME

Chapter 5

Mineral Demand The Theory in Practice

Peter Howie

Introduction
The final product demand curve and the level of consumption
Final product demand and its determinants
Mineral resources and derived demand
The mineral demand curve
Shifts in the mineral demand curve
Elasticity of mineral demand
Own price elasticity of mineral demand in the short run
Income elasticity of mineral demand in the short run
Cross-price elasticity of mineral demand in the short run
Elasticity of mineral demand in the long run
Conclusions

INTRODUCTION
Minerals are widely used in the modern economy. How
these uses change as the result of changing economic,
political and technological circumstances is the subject
of mineral demand. Because the demand for minerals
is multifaceted, it is also essential to have a good
knowledge of the fundamentals that affect mineral
demand so as to analyse and forecast output and price
behaviour.
The demands for minerals are commonly separated
into three categories for ease of presentation: derived,
created and historical. Industrial demand for minerals
predominantly derives from their unique physical
and chemical properties that enable their use in
varied applications. Discussions of mineral demand
particularly recognise this characteristic. There is a
strong link between these uses and economic growth,
and this relationship is likely to continue into the future.
For many of the minerals sold as jewellery, demand
has been created and requires constant promotion.
The most famous example of created demand is the
association of diamonds with love and commitment,
developed by De Beers Consolidated Mines in
association with NW Ayer and Son (Pequignot, 2010).
In fact, the slogan a diamond is forever, is widely
considered the most recognised and effective slogan of
the 20th century (Otnes and Pleck, 2003).
The growth in demand for jewellery is highly
correlated with the demand for gold and other precious
metals in the USA, Asia and the Middle East. Consumers
in the developed markets of the west buy jewellery
primarily for adornment and often for sentimental
reasons; whereas, in the developing markets of Asia
and the Middle East, they purchase it for investment as
well as adornment.
Investment demand is, for the most part, historical
and relies on international currency movements and
inflation. The monetary demand for gold and, to a lesser
extent, other precious metals, has derived value from
providing stability and security to overall investments.
This chapter is organised to permit an orderly
presentation of the basic topics of mineral demand,
separated into four parts. The first presents the concept
of final-product demand and introduces some of the
economics required to understand subsequent sections.
The second focuses on the derived demand for minerals
and the characteristics of such demand. The third

Mineral Economics 51
chapter 5 Mineral Demand The Theory in Practice
introduces the concept of elasticity and progresses, with
an in-depth examination of the sensitivity of mineral
demand to changes in prices and income. This section
also examines the effect of time on mineral demand.
The fourth section offers some concluding comments.
THE FINAL-PRODUCT DEMAND CURVE AND
THE LEVEL OF CONSUMPTION
This section presents some necessary economic tools
as well as generating both individual consumer and
market final-product demand curves. Economists
define a final product as a product that is produced for
its final user and not as a component of another good
or service. For example, an Apple iPad, a pair of gold
earrings and gold bullion used for investment are final
products; however, copper wiring in the iPad and gold
in the earrings are intermediate products or inputs. To
help with the formal development of the final-product
demand curve, let us introduce the hypothetical
scenario of Ms Sangeeta Kumar, a Senior Manager at
the Tata Group in India. Ms Kumar is interested in
purchasing gold earrings for the upcoming year.
Since most goods are scarce and Ms Kumar cannot
have everything that she wants, she must make tough
choices. The science of economics tells us that every
time we make a choice, because resources are scarce,
something else must be given up. That is, when Ms
Kumar purchases one good she is giving up the
opportunity to purchase another good or service
with the money she spends. Furthermore, economics
provides us with a set of tools that can help make the
best decision available. This set of tools is based upon
the philosophy of utilitarianism. The foundation of
utilitarian philosophy is:
actions are right in proportion as they tend to
promote happiness; wrong as they tend to produce
the reverse of happiness. (Mill, 1863)
In other words, utilitarian philosophy suggests that
Ms Kumar makes decisions with the ultimate objective
of maximising her happiness, both intellectual and
sensual.
Commonly people believe that choices they make are
in the form of the following question: which and how
many pairs of earrings should I purchase? The answer
to this question is believed to be that the Ms Kumar
decides to purchase the pairs of earrings that she likes
the best so long as they are within her budget.
Economists suggest that such questions should be
answered by comparing all the costs, not only money
costs but also the costs associated with an inability to do
something else. Therefore, when Ms Kumar purchases
earrings, economists suggest that she compares all costs
and benefits. Often, however, it is difficult or impossible
to list all the available purchase options within a
persons budget. Luckily, economics provides us with
a simple way to approach this problem. It suggests that
52
we break the question: how many and which pairs
of gold earrings should Ms Kumar purchase? into a
series of questions.
Before doing this, let us make two simplifying, but
realistic, assumptions:
1. Ms Kumar budgets a certain amount of money to
buy gold earrings and she spends all of this money
either on gold earrings or on another product.
2. Benefits from the purchases are expressed in terms
of money. This means that all benefits, both sensual
as well as intellectual, from the purchase of gold
jewellery are measured in terms of equivalent
money value.
Key questions to be asked are:
How much is Ms Kumar willing to pay for the first
pair of earrings?
How much is Ms Kumar willing to pay for a second
pair of gold earrings?
How much is Ms Kumar willing to pay for each
subsequent pair of gold earrings?
This type of questioning examines the effects of
changes in happiness with each additional purchase.
It allows us to determine the number of dollars (or
Rupees) that Ms Kumar regards as equivalent to each
pair of earrings. It is a direct measurement of the
benefits she receives from each pair of earrings.
As Table 5.1 shows, Ms Kumar derives $300 worth of
benefit from one pair of earrings, $550 worth of benefit
from two pairs of earrings, and so on. So she receives
$300 of benefit from the first pair of earrings, $250 from
the second pair, and so on. The additional benefit that
a consumer receives from consuming the next unit of
a product is referred to as marginal benefit. For Ms
Kumar, marginal benefits are the amounts of money
that she is willing to pay to enjoy the attributes of an
additional pair of gold earrings. For example, the
marginal benefit from the third pair of earrings is $204.
Table 5.1 also shows that as Ms Kumar buys more
and more pairs of earrings, the benefits that she derives
from each additional pair will be less than that from
the previous pair. Therefore, the graph of her marginal
benefits from earrings is downward sloping (see
Figure5.1).
Table 5.1
Marginal and total benefits.
Pairs of earrings Total benefits Marginal benefits
0 0 -
1 300 300
2 550 250
3 754 204
4 918 164
5 1048 130
6 1148 100
Mineral Economics
 chapter 5 Mineral Demand The Theory in Practice

350 As Demand Bs Demand Market Demand

300
$/unit $/unit $/unit
Marginal benefits (dollars)

250

200
130
150
100
100

50
Q/t Q/t Q/t
5 6 6 8 11 14
0
0 1 2 3 4 5 6 Fig 5.2 - Individual and market demand curves.
Pairs of gold earrings per period

Fig 5.1 - Marginal benefit curve.
Ms Kumars marginal benefit curve from gold
earrings (or any individual product or service) is
identical to her individual demand curve for gold
earrings (or any individual product or service). That is,
the demand curve for gold earrings shows the marginal
benefits received from consuming gold earrings during
a certain period of time.
It is also possible to derive the market demand
curve for gold earrings. Table 5.2 provides a simplified
example of the gold earrings market if there were only
two consumers. At $130 per pair of earrings, consumer
A demands five pairs per period and consumer B
demands six pairs per period. Therefore, the market
demand for gold earrings at $130 is 11 pairs of earrings.
Similarly, at $100 per pair of earrings, consumer A
demands six pairs and consumer B demands eight
pairs; therefore, the market demand is 14 pairs. This
procedure of generating the market demand is often
described as announcing a price and adding up the
individual quantities demanded at that price. This
procedure is the same whether there are only two
consumers in a market or many millions.
Table 5.2
Individual and market demand.
Price Consumer A's Consumer B's
($/pair) demand demand
160 4 4
130 5 6
100 6 8
70 7 10
40 8 12
Figure 5.2 provides a graphical representation of the
market demand for gold earrings outlined in Table 5.2.
It is important to understand why the market demand
curve is drawn as it is. Along the demand curve only
price and quantity demanded are allowed to change,
while income and the prices of related goods are held
constant. Furthermore, there are two independent
reasons for the market quantity demanded of a good
or service to fall as its price increases. One is that many
people will switch to a substitute good. If the price of
gold jewellery was to rise, some consumers may switch to
platinum jewellery, others to silver jewellery. The second
reason is that consumers are unable to buy as much as
before. Incomes usually do not fluctuate with the price of
an individual product and when the price of a good goes
up, it is not possible to buy as much as before unless the
consumer purchases less of something else.
Similar to the market demand curve, the market
supply curve represents the behaviour of suppliers
during a given period of time. The market supply curve
shows the total number of units of a good or service
that sellers are willing to deliver to the market at every
possible price during a given period. Market supply
curves generally slope upward, indicating that sellers
are willing to supply a higher quantity as the price rises.
When the price is such that the quantity that buyers
want to buy is the same as the quantity that sellers
want to sell the market is said to be in equilibrium.
If consumers wish to consume more than producers
wish to produce, there will be buying pressure and the
quantity demanded will exceed the quantity supplied.
As a result, price will rise. Conversely, if consumers
wish to consume less than producers wish to produce,
there will be selling pressure and the quantity supplied
will exceed the quantity demanded. With this scenario
Market price will fall. Such changes will continue until
demand equilibrium is achieved quantity demanded equals
8 quantity supplied. The price that accomplishes this is
11 termed the equilibrium price and the corresponding
14 quantity the equilibrium quantity.
17 Final-product demand and its determinants
20 Recall that the demand curve shows that if there is an
increase in the price of goods, consumers will purchase
less of the goods, all other things equal. In other words, if
price goes up, quantity demanded will go down; if price
goes down, quantity demanded will go up. This is the
concept that economists refer to as the law of demand.
It indicates that if there is an increase in the price of a
product, then there will be a leftward movement along
its demand curve, and vice versa. Economists refer to
movements along the demand curve as changes in the
quantity demanded.

Mineral Economics 53
chapter 5 Mineral Demand The Theory in Practice
It is important to realise that the demand curve by
itself isolates the impact of price on the quantity of a
product demanded. Because the law of demand is
one-dimensional (that is, it only examines the impact
of quantity demanded caused by changes in the price
of the good and vice versa) it leaves out elements
that shift the demand curve. For example, the law of
demand cannot fully explain the increase in the price
of gold from around US$800/oz in November 2008 to
more than US$1800/oz in August, 2011. That is because
the quantities consumed and produced are not solely
determined by price.
One key to the higher gold price lays in changes of
investors preferences for gold due to the concerns
about the global economy and sovereign debt issues,
particular those of the United States. After November
2008, investors became increasingly worried about the
safety of their US dollar-denominated money and there
was an increase in the preference to hold gold as an
alternative.
In addition to the growing investment demand for
gold bullion, gold jewellery demand has seen recent
increases due to changes in consumer preferences.
Even with a 23 per cent increase in the price of gold
during 2010, the World Gold Council estimated that
the consumption of gold was up 22 per cent in tonnage
terms (or 53 per cent in dollar terms) in 2010 (World
Gold Council, 2011).
A change in preferences of consumers (ie consumers
of gold jewellery) and investors who are consumers of
gold bullion is only one of several non-price factors that
change the quantity of a good that is consumed. These
non-price factors shift the demand curve. Specifically,
the demand curve:
shifts to the right if a non-price factor causes the
quantity consumed to increase
shifts to the left if a non-price factor causes the
quantity consumed to decrease.
Other non-price factors that shift the demand curve
include the level of income, the prices of related goods
and expectations.
The expectations of final consumers are very impor-
tant to gold jewellery demand. A large proportion of
the 17per cent increase in gold jewellery demand by
the worlds largest consumer of gold jewellery, India,
during 2010 was due in part to a widespread expectation
of higher gold prices (World Gold Council, 2011). China,
the second largest consumer of gold jewellery, witnessed
13 per cent growth in jewellery consumption, especially
in the pure gold (24 carat) segment, suggesting that
expectations of higher gold prices were playing an
increasing role in the demand for gold jewellery for the
Chinese (World Gold Council, 2011).
Institutional investors use gold as a hedge against
inflation or a fall in the US dollar. Remember that
gold transactions are denominated in US dollars. The
54
importance of the role of expectations by institutional
investors is made clear by the actions of these after
September 2008. On 17 September 2008, spot gold
jumped by nearly $90 an ounce, a record one-day gain,
as these investors sought safety amid turmoil in stock
markets. Furthermore, during the week of 8 September
2009, purchases of long positions of gold futures
contracts reached their greatest number for the 2000
- 2010 period as institutional investors worried about
the weakness of the US dollar and concerns over the
economic recovery (United States Commodity Futures
Trading Commission, 2011).
Finally, the level of income and prices of related goods
are also important to the demand for gold. Chinas
demand for gold jewellery increased from just over
500 000 oz in the late 1980s to over 12 Moz at the end
of 2010, in spite of the price of gold going from $200
to $1500/oz. This rise in consumption coincided with a
dramatic rise in Chinas per capita income from $350 in
1991 to $3650 in 2009 (World Bank, 2011).
MINERAL RESOURCES AND DERIVED
DEMAND
Up to now, we have discussed the consumer demand
for final goods and services. However, most minerals
are not final goods. Consumers do demand precious
metals and gems as final goods, but these uses are a
small fraction of total mineral demand. For the most
part, minerals are used as inputs for final goods and
services. Therefore, the demand for most minerals
is derived from the demand for the final goods and
services for which the mineral is an input. Demand of
this type is known as derived demand. For example,
the demand for copper in mobile telephones is derived
from the demand for mobile telephones. Consumers
of the final product, here mobile telephones, are not
concerned about which inputs are used as long as the
mobile telephone meets their specifications.
The mineral demand curve
There is a clear relationship between final-product
demand and the derived demand of a mineral to make
these final products. Recall that determining final-
product demand involves the ultimate objective of
maximising a consumers happiness, determined by
the prices of goods and by the income available for
their purchasing. In contrast, for our mobile telephone
manufacturer, who requires inputs for its production,
mineral demand is a special case of demand in which
the purchased goods are the inputs for production.
As a result, the demand for minerals is linked closely
with firms production processes. Our firms mobile
telephone production process, and its demand for
copper, expresses a relationship between its inputs
and its outputs. Economists formally represent this
production relationship by the production function.1
1 We have introduced the production function in Chapter 2.
Mineral Economics
 chapter 5 Mineral Demand The Theory in Practice
The production function is a non-monetary
relationship that correlates physical inputs to physical
outputs. Prices and costs are not considered. A typical
production function for a firm with only one variable
input, say copper, and a set level of fixed inputs appears
in Figure 5.3. In this example, the fixed inputs those
inputs whose quantities cannot be readily changed in
an effort to alter the rate of output include pieces of
equipment and machinery, the factory space available
for production, the know-how of managerial personnel
and all labour. The vertical axis shows the total output
of the final good (mobile telephones), and the horizontal
axis shows the units of copper employed.
Quantity of mobile
telephones per time period
B
A will always try to operate beyond this stage. It turns out
Units of copper
per time period
X telephones increases at a decreasing rate. That is, both
Y the additional amount of mobile telephones generated
APP
MPP
Units of copper
per time period
Stage 1 Stage 2
Fig 5.3 - The production function.
All points above the production function are
unobtainable with current technology, all points below
are technically feasible and all points on the function
show the maximum quantity of output obtainable at
the specified levels of inputs. From the origin, through
points A and B, the production function is rising,
indicating that as additional units of copper are used,
the quantity of mobile telephones also increases.
From the origin to point A, as the firm uses additional
units of copper, the number of mobile telephones
produced increases at an increasing rate. In economics,
we call the increase in output generated by adding
an additional unit of the variable input the marginal
physical product (MPP). For the mobile telephone
manufacturer, MPP is the increase in output of mobile
telephones caused by increasing the amount of copper
by one unit. As the number of mobile telephones is
increasing from the origin to point A, then the firms
marginal physical product is also increasing, as shown
by the increasing marginal physical product of copper
form the origin to point X. The average amount of
Mineral Economics
telephones generated by each unit of copper employed
the average physical product (APP) is rising along
the production function between the origin and pointA.
Point A defines the starting point beyond which the
number of mobile telephones produced increases at
a decreasing rate when additional units of copper
are employed. This corresponds to declining MPP of
copper beyond point X.
Point B is the starting point beyond which the average
amount of telephones produced by each unit of copper
employed starts to decrease. This trend is shown by the
declining slope of the APP curve beyond point Y.
To simplify the interpretation of a production function,
it is common to divide its range into two stages. In
Stage1 (from the origin to point B) the average number of
mobile telephones generated by both the variable input,
here copper, and the fixed inputs is rising reaching a
maximum at point B. Because the average number of
mobile telephones generated by both the variable and
fixed inputs is increasing throughout Stage 1, the firm
that in Stage 1, fixed inputs are underutilised.
In Stage 2 (beyond point B), the output of mobile
by each additional unit of copper used and the average
amount of mobile telephones generated by each unit
of copper used are decreasing. However, the average
number of mobile telephones generated by the fixed
inputs is still rising. It turns out that the optimum
copper/mobile telephone combination will be in
Stage2. Therefore, a profit-maximising firm will always
operate somewhere in Stage 2. As a result, from here on,
our discussion of the marginal physical product curve
refers to the downward sloping portion in Stage 2.
The next step is to determine how many units of
copper a profit-maximising firm will employ. The
answer is straightforward: our firm will employ any
unit of copper that produces greater revenue than
the copper adds in cost. That is, the firm will use an
additional unit of copper when the benefits from its use
are greater than its additional costs. For simplicity let
us assume that:
the added cost equals the market price of the copper
(which implies that the buyer of copper is a price
taker)
the price of mobile telephones is held constant.
The value that copper contributes to the mobile
telephone manufacturer depends on two things: how
much the output of mobile telephones increases by
adding an additional unit of copper and the extra
revenue that each additional mobile telephone brings
to the firm. In economics, we call the value that an extra
unit of variable input contributes the marginal revenue
product (MRP) as opposed to the MPP. The MPP of
55
chapter 5 Mineral Demand The Theory in Practice
copper is simply the added revenue or benefit to the
firm of employing an extra unit of copper. For our
mobile telephone manufacturer, this benefit equals the
marginal physical product of copper, multiplied by the
market price of the mobile telephone.
The cost of the copper, by the above assumption,
is its market price. Therefore, the mobile telephone
manufacturer will employ additional units of copper
until the benefit that an extra unit of copper contributes
(the MPP) equals the market price or cost of an extra
unit of copper.
A numerical example may help to clarify this idea.
Nokia, a leading firm in the mobile telephone industry,
has a mobile telephone assembly factory in Chennai,
India. Suppose Nokia pays US$12/kg for copper wiring
and it receives 540 rupees (equivalent to US$12) for
each telephone. Adding another kilogram of copper
will allow Nokia to make two more mobile telephones
per hour. Is it worthwhile to add another kilogram of
copper? Using the rule discussed above, one sees that
the extra value to Nokia is 2 US$12 or US$24. The
extra cost to Nokia of another kilogram of copper is
US$12. Therefore, it is profitable for Nokia to add the
extra copper. After this kilogram of copper is added,
Nokia may find that adding another kilogram of copper
will add only one more mobile telephone. In this case
Nokia is indifferent to adding an extra kilogram of
copper because to generate an extra US$12 of income
costs US$12. It is not in Nokias interests to employ any
additional units of copper because the extra value that
the additional unit of copper would generate is less
revenue than the price of copper.
An important characteristic of the marginal revenue
product curve of a mineral is that it corresponds to a
manufacturers demand curve for the mineral. Nokias
mineral demand curve identifies the amount of copper
it chooses to employ at different prices, holding
everything else constant including the price of mobile
telephones.
Now let us examine the market demand curve
for copper. If we assume that the price of mobile
telephones and the price of copper remain constant,
then market mineral demand curve for copper is the
horizontal sum of individual firm copper demand
curves. However, if the demand for copper increases
the market price of copper, then the result is a change
in the quantity, price, or both the price and quantity
of mobile telephones. As a result, the market mineral
demand curve, when mineral price changes, tends
to have a steeper slope than the one obtained from
the simple horizontal summation of individual firm
copper demand curves (Campbell, 1985).
We now have one half of our market for minerals
mineral demand and the market mineral demand
curve. We now need to briefly look at the supply side of
the minerals market2. We can once again use the Nokia
2 We will do this in more detail in Chapter 6.
56
example and attempt to put ourselves in the position
of the mineral suppliers the copper producers. If the
price of copper increases, copper producers are willing
to supply more copper to the market.
As a result, the mineral supply curve is positively
sloped. That is, at a higher price there will be a greater
quantity of copper supplied. If we combine this supply
information with our information on mineral demand
we get a diagram such as Figure 5.4, which describes
the achievement of equilibrium in the mineral market.
$/unit
S
P*
D
Q/period
Q*
Fig 5.4 - Equilibrium in a mineral market.
This analysis is similar to the supply-demand analysis
we explored earlier for gold earrings. The market will
tend toward the equilibrium where mineral supply
equals mineral demand. At any other price a shortage
(price too low) or a surplus (price too high) will occur
and there will be adjustments in the price to bring the
market to the equilibrium.
Shifts in the mineral demand curve
In the section Final-product demand and its
determinants, we discussed factors that shift the final-
product demand curve. A parallel discussion for the
mineral demand curve is necessary as some of the factors
that cause it to shift are different from the factors that
shift the final-product demand curve. These different
factors reflect the derived nature of the input demand
curve. In this discussion we discuss three factors that
cause the mineral demand curve to shift. They are:
1. changes in demand for a final product
2. changes in technology
3. changes in the mix of inputs.
First, let us consider changes in consumer demand
for a final product. As you would expect, there is a
direct positive relationship between final-product
demand and mineral demand. That is, an increase in the
demand for mobile telephones will increase the demand
for copper. On a graph, this translates to a rightward
shift of the mineral demand curve. A decrease in the
demand for mobile telephones will reduce the demand
for copper. On a graph, this equates to a leftward shift
of the mineral demand curve.
Second, let us think about changes in technology. Recall
that the production function is constructed assuming:
Mineral Economics

constant technology in the minerals industry
constant technology in the final product industry.
Within the minerals industry, changes in technology
have led to increased availability and utilisation of
capital equipment and minimised non-productive
work hours. More generally, they have brought more
cost-effective mineral exploration, mine development
and mineral processing. The result is a rightward shift
in the mineral supply curve (discussed in Chapter 6).
By contrast, technological changes in a manufacturing
process for a downstream intermediate or final product
that uses a mineral such as copper as an input will
cause a shift in the copper demand curve. There are two
types of technological changes in these manufacturing
processes that may cause the copper demand curve to
shift. They are:
1. the refinement and improvement of existing
processes
2. the development of new products.
The steel smelting industry provides a good example
of refinement and improvement technological change.
During the early 1960s, technological innovation in the
injection of pulverised coal into blast furnaces reduced
coking coal rates by 36 per cent per tonne of steel. By
the beginning of the 1990s injection rates of coking coal
had declined by an additional 15 per cent per tonne of
steel (Mitchell, no date). When technological change
permits the use of a smaller quantity of mineral inputs
to obtain a given level of output, the final-product
production function, here the production function for
steel, shifts leftward, as shown in Figure 5.5, and the
mineral demand curve will shift to the left.
Quantity of steel output
per time period
Production
Production function
function after before technological
technological change
change
Units of coal
per time period
Fig 5.5 - Technological change shifting final-product production function.
Even though refinement and improvement
technological changes directly reduce the demand
for coal in the production of steel, it also indirectly
increases the demand for coal in the production of steel.
An important result of refinement and improvement
technological change is its ability to lower the cost of
delivering an extra unit of steel to market. This will
increase the quantity of steel demanded, which will also
increase the demand for coal. Hence, the coal demand
curve will shift to the right. To conclude, the final result
of refinement and improvement technological changes
on a specific minerals demand curve is uncertain.
Mineral Economics
chapter 5 Mineral Demand The Theory in Practice
Technological changes that develop new products can
either increase or decrease the demand for a mineral.
For example, optical fibre cables, which are now used
widely in telecommunications, have replaced huge
tonnages of copper wire. Comparisons indicate that
an optical fibre can carry over a quarter million times
more information than a similarly sized copper wire
(Dulay, 2004). In contrast, renewable energy projects
consume significant amounts of copper. On average,
a one megawatt wind turbine contains 3.9 t of copper
and a photovoltaic installation approximately 4 kg of
copper per kilowatt of installed capacity (European
Copper Institute, 2008). In 2008, this group estimated
that the wind turbines installed in the European Union
contained 190 000 t of copper and the photovoltaic
installations nearly 19 000 t. The decision by Germany to
close down its 17 nuclear power plants, which generate
one-quarter of the countrys electricity (approximately
151 TWh), by 2022 and shift to renewable sources
should greatly increase the installed amount of copper
for energy production, and in turn copper demand,
over the next ten years (Federal Statistical Office of
Germany, 2011; Wiesmann, 2011).
The third factor that causes the mineral demand curve
to shift is a change in the price of other inputs, which
causes a change in the mix of the inputs used. The effect
of a change in the price of one mineral, say aluminium,
on the demand for another mineral, say copper, may
be uncertain. Aluminium and copper are often used
together in coaxial cable, with copper as the centre
conductor and aluminium as the shield. However,
aluminium is a substitute for copper in electric motor
rotors and many other electrical applications.
When aluminium is a complement of copper, a
decrease in the price of aluminium causes a rightward
shift in the mineral demand curve for copper and an
increase in the price causes a leftward shift.
Price changes for a substitute mineral are more
complicated. There is a direct effect as well as an
indirect effect of the price change. A higher price of
aluminium destined for the electric rotor industry may
result in a direct increase in the use of copper because
copper will be substituted for aluminium. However,
the higher price of aluminium may cause copper use
to decline indirectly because copper may not be able to
completely replace all aluminium. The indirect effect of
the increase in the price of aluminium is caused by the
increase in the cost of producing the final product, which
in turn leads to lower production and less demand for
both aluminium and copper. The final result of a price
change for a substitute mineral depends on which effect
is larger, the direct or indirect, and varies from product
to product.
ELASTICITY OF MINERAL DEMAND
When there are price movements along the demand
curve as well as shifts in demand, it is important to
57
chapter 5 Mineral Demand The Theory in Practice
have an estimate of the magnitude of these changes.
Economists use the concept of elasticity of demand to
indicate the quantitative impact of the factors affecting
demand. Even though it is a simple concept, elasticity is
one of the most powerful devices used by economists.
It is simple because it is no more than a form of
measurement that tells how sensitive one variable is to
another. It is powerful because of the way economists
make use of how benefits and costs change by very
small changes in specific variables such as prices and
income. The concept of elasticity can be used to help
answer questions such as:
Will an increase in the price of a firms product make
the firm more or less profitable?
If the price of a particular good increases, will the
amount of the good purchased change significantly
or minimally?
Economists have identified three main types of
elasticity of mineral demand:
1. own-price elasticity of demand, which measures
how the quantity demanded of a mineral changes if
its price changes
2. income elasticity of demand, which measures how
the quantity demanded of a mineral changes if
income increases
3. cross-price elasticity of demand, which shows how
the quantity demanded of one mineral changes if
the price of another mineral changes.
The discussion of elasticity is separated into two
parts because elasticity is determined, in part, by the
time period involved. Therefore, part one introduces us
further to the concepts of elasticity of mineral demand
and applies the concepts of elasticity to the short run.
Part two then shows how the elasticities of mineral
demand change over time and presents how economists
use long-run elasticities.
Economists commonly separate economic periods
into the short run and the long run3. The short run
is a period in which at least one factor or aspect of market
conditions is fixed.
Campbell (1985) argues that a firms lease, existing
production capacity, agreed-upon labour contracts and
several other operating conditions are fixed in the short
run. When considering mineral demand, fixed factors
in the short run would include the capital stock of
companies using a specific mineral in the manufacture
of a final product.
By contrast, the long run has no such fixed costs and
conditions; everything is free to change. Given more time,
manufacturers can develop new strategies for adjusting
production processes such as substituting copper for
aluminium; or consumers can adjust personal lifestyles
such as purchasing 18-carat white gold instead of
platinum jewellery.
3 In Chapter 6, we use the related classification of the immediate run, the short run,
the long run and the very long run.
58
An important consideration between the short and
long run is that the definitions do not include a definite
time period. The definitions are based on the degree of
flexibility to which firms have to change their inputs
and consumers have to change their lifestyles. One of
the consequences of the definitions is that the relevant
time period that distinguishes the short run from the
long run will vary from industry to industry.
Own-price elasticity of mineral demand in the
short run
The definition of own-price elasticity of demand is the
percentage by which quantity demanded changes if its
price increases by one per cent, all other things being
equal. The simple formula is:
% change in quantity demanded
Own price elasticity of demand =
% change in price
Own-price elasticity of demand is negative because
of the inverse relationship between price and quantity
demanded, as indicated by the law of demand.
If demand is elastic, the ratio of percentage change
in quantity demanded resulting from a one per cent
change in price will have an absolute value greater
than one4. If demand is inelastic, the ratio will have an
absolute value between zero and one.
Generally, demand for luxury goods is price inelastic,
as are the demands for essential products such as petrol
and food since people generally buy them even if
their price goes up. In contrast, the demands for many
consumer goods such as gold jewellery and housewares
are elastic, since people can easily find substitutes or do
without them.
Figure 5.6 illustrates two demand curves: one for gold
jewellery and the other for petrol. From the diagram,
when the price of gold jewellery rises from P1 to P2,
the per cent change in the quantity demanded of gold
jewellery from Au1 to Au2 is greater than the percent
change in price. Therefore, gold jewellery is own-price
elastic at point Au1. Conversely, when the price of petrol
rises from P1 to P2, the per cent change in the quantity
demanded of petrol from P1 to Pet1 to Pet2 is less than
the per cent change in price. Therefore, petrol is own-
price inelastic at point Pet1.
Gold Jewellery: Petrol:
Elastic Demand Inelastic Demand
$/unit $/unit
small percentage
change in quantity
large percentage change demanded large
in quantity demanded percentage change
small percentage change in price
in price
P2 P2
P1 P1
DAu
DPetrol
Au2 Au1 QAu/period Pet2 Pet1 QPetrol/period
Fig 5.6 - Sensitivity of mineral demand to price changes.
4 Absolute value means ignoring the sign. The absolute value of -1 is 1.
Mineral Economics

Before discussing the determinants of own-price
elasticity of mineral demand, it is important intuitively
to understand own-price elasticity. Suppose Nokia
spends a portion of its budget on copper wiring. If the
price of copper wiring rises by five per cent, Nokia may
buy less, but does the company buy six per cent less or
just two per cent less? In the first case, demand would
be own-price elastic, in the second, own-price inelastic.
Clearly in the case of petrol, a rise of five per cent in the
price would not cause a buyer to reduce his consumption
of petrol by more than five per cent. That is, there is a
small effect of a price change on rates of consumption.
The argument would be similar for copper wiring.
The demand curves for most minerals are own-price
inelastic that is, steeply sloped if we are considering
the short run because manufacturers and consumers
that use minerals as inputs are constrained by their
existing plants, equipment, and vehicles.
In contrast, a higher gold price would cause a
consumer to buy significantly less new gold earrings
or other jewellery if her own-price elasticity of gold
were elastic. That is, a rise of five per cent in the price
of gold jewellery would cause the consumer to reduce
her consumption of gold jewellery by more than
fivepercent.
A good way to examine the factors affecting the own-
price elasticity of the mineral demand curve is to use
concepts developed in the four Hicks-Marshall laws of
derived demand. These four laws are named after the
two distinguished British economists, John Hicks and
Alfred Marshall, who are closely associated with their
development. In his Principles of Economics, Marshall
(1920) formulated four rules on the determinants of
own-price elasticity of derived demand. Hicks (1966,
pp 241-247) re-examined Marshalls four rules in The
Theory of Wages, describing own-price elasticity of
derived demand for labour in terms of substitutability
of inputs and own-price elasticity of final-product
demand. While full statements of the four laws are
quite complex, brief and simplified versions of them
yield invaluable insights into the determinants of own-
price elasticity of mineral demand.
The four Hicks-Marshall laws of derived demand
conclude that the demand for a mineral will be own-price
elastic when:
1. the demand for the final product, in which it is an
input, is own-price elastic
2. it is relatively easy to substitute other inputs for the
mineral
3. the supply of other production inputs is own-price
elastic
4. the mineral accounts for a relatively large share of
total costs of producing the final product.
Let us examine each of these laws in turn. The first
Hicks-Marshall law states that mineral demand will be
own-price elastic when the demand for the final product is
Mineral Economics
chapter 5 Mineral Demand The Theory in Practice
own-price elastic. Economists traditionally examine the
response of mineral demand to a final-product price
change by assuming that the proportions of inputs are
fixed. When the demand for the final product is own-
price elastic, say -1.5, then the demand for the final
product changes 50 per cent more proportionally than
the price. However, when the demand for the final
product is own-price inelastic, say -0.5, then quantity
demanded of the final product changes only half as
much proportionally as the price. Therefore, when the
demand for a final-product is own-price elastic, there
will be a greater reduction in the use of all inputs.
A good example for the first Hicks-Marshall law is
the use of silver in jewellery and dental filling alloys.
The estimated demand for silver jewellery is strongly
own-price elastic (Venkatesh, 2002; GFMS Limited,
2004) whereas the estimated demand for dental services
is own-price inelastic (Eriksson, 2003; Grytten, 2005;
Manning and Phelps, 1978)5. As the own-price elasticity
of demand for silver jewellery is own-price elastic, an
increase in the price of silver jewellery will result in
a large reduction in the quantity demanded of silver
jewellery. This will, in turn, cause a large reduction in
the use of silver. Therefore, an increase in the price of
silver jewellery will result in a large reduction in the
quantity of silver demanded for silver jewellery. In
contrast, the demand for dental services is own-price
inelastic; therefore, an increase in the price of silver
dental fillings will result in only a small reduction in
the quantity of silver demanded for silver dental filling
alloys.
The second Hicks-Marshall law states that mineral
demand is own-price elastic when it is relatively easy
to substitute other inputs to replace the mineral under
consideration. One measure of substitutability between
inputs considers how much input proportions change
when the price of one of the inputs, say copper, changes,
holding output of the final product at a fixed level.
When it is easy to substitute other inputs for copper
then a small change in the price of copper will cause a
large change in the proportion of the inputs used. On
the other hand, when it is difficult to substitute other
inputs for copper then a small change in the price of
copper is probably not going to cause a firm to replace
a unit of copper with a unit of another input.
Decisions about the substitution between a specific
mineral and other inputs depend on two general
factors: technology and relative prices. Different
combinations of inputs will produce different levels
of output. The results of different combinations of a
mineral such as copper and the remaining inputs to a
final product reflect the technology that is available to
the manufacturer.
One example of the second Hicks-Marshall law is
seen with naturally-occurring rutile being substituted
5 In their study of the USA, Manning and Phelps estimated that own-price elasticity for
dental visits was -0.7.
59
chapter 5 Mineral Demand The Theory in Practice
by synthetic rutile which is produced from ilmenite
in the titanium dioxide white pigment, metal and
welding-rod coatings markets (Ward, 1990). As it
is relatively easy to substitute synthetic rutile for
naturally-occurring rutile, a price increase in naturally-
occurring rutile will result in a large reduction in the
quantity of naturally-occurring rutile demanded.
The third Hicks-Marshall law states that mineral
demand will be own-price elastic when the supply of other
factors of production is relatively own-price elastic. It is
worth digressing for a moment to discuss own-price
elasticity of supply (also discussed in Chapter 6).
The responsiveness of supply to changes in price of
a good or service is its own-price elasticity of supply,
as illustrated in Figure 5.7. The definition of own-
price elasticity of supply is the percentage by which a
products quantity supplied would change if its price
were to increase by one per cent, all other things being
equal. The simple formula is:
% change in quantity sup plied
Own price elasticity of sup ply
% change in price
$/unit
Elastic Supply
$/unit
Inelastic Supply
S in its price.
P2
S inelastic as has recently been in Chile6 increases in
P2
P1
P1
D
D D
D electricity limits the amount of additional electricity
Q1 Q2 Q/period Q1 Q 2
Fig 5.7 - Own-price elasticities of supply.
When supply is inelastic, a change in demand affects
the price more than the quantity supplied. The reverse
is the case when supply is elastic a change in demand
is met with a small change in market price.
The third Hicks-Marshall law examines the ease with
which a mineral can be substituted by other inputs. From
the discussion of the Hicks-Marshall second law it can be
seen that substitution between a mineral and other inputs
generally depends on technology and relative prices.
However, substitution of one mineral input for another,
say aluminium for copper, can be also affected by spare
capacity in an input industry as well as the level of stocks
or inventories of the other inputs. If there is plenty of
spare capacity of aluminium or if its stocks are high, a
manufacturer will find it more beneficial to substitute
aluminium for copper, all other things being equal. Spare
capacity and a high level of stocks correspond to elastic
supply. Therefore, if the price of copper increases and the
supply of aluminium is own-price elastic, the increase in
demand for aluminium will have little effect on the price
of aluminium and a manufacturer may significantly
increase profits by increasing its use of aluminium and
decreasing its use of copper.
60
However, if the supply of aluminium is inelastic, the
increase in demand for aluminium will substantially
increase its price and the additional quantity of
aluminium supplied to the market will be small. In this
case, a manufacturer would not increase its profits by
increasing its use of aluminium and decreasing its use
of copper.
A good example of the third Hicks-Marshall law
applied to manufacturing in the Former Soviet Union
during the 1990s, ie in the early years of transition from
socialism to capitalism. One of the impacts of inefficient
Soviet central planning was that industry became
heavily dependent on energy priced far below world
levels (Platts, 2004; European Bank of Reconstruction
and Development, 2002). During the 1990s, energy
consumption fell principally as the result of the severe
decline in output in the early 1990s. For example,
Kazakhstans net energy consumption decreased
by 45per cent between 1992 and 1998 (United States
Energy Information Administration, 2003). As a result,
during the 1990s there was abundant excess capacity in
electricity generation and the supply of electricity was
quite elastic. A large increase in demand for electricity
in the Former Soviet Union would result in a large
increase in electricity use and a relatively small increase
By contrast, when the supply of electricity is relatively
demand drive up electricity prices by a relatively large
amount, but the quantity of electricity used by industry
increases only minimally. The increase in the price of
D
D
Q/period
that can be used as a substitute for another fuel mineral.
The fourth Hicks-Marshall law states that mineral
demand is own-price elastic when the mineral accounts for
a relatively large share of total costs. In this situation, a
price increase of the mineral will have a large effect on
a manufacturers costs and, therefore, a large effect on
the price of the final output. With this large increase
in the price of the final product, the decrease in the
quantity of the final product demanded will be large
and, consequently, the reduction in the minerals use
will also be large, all other things equal.
The use of aluminium and palladium in motor
vehicles explains the idea in the fourth Hicks-Marshall
law. In 2008, a typical family automobile contained
248kg of aluminium and between three and six grams
of palladium (Ducker Worldwide, 2008 and Loferski,
2011). If palladium costs account for 0.25 per cent of
total costs of an automobile, a doubling of its price will
increase the total cost by 0.25 per cent. By contrast, if
aluminium inputs account for two per cent of total costs
of an automobile, a doubling of its price will increase
total costs by two per cent. As a result, aluminium has a
higher own-price elasticity of demand than palladium
in the automobile industry.
6 Energy prices in Chile have nearly tripled in the last five years. This has caused copper
mines to rely more heavily on diesel-powered generation (Haynes, 2011).
Mineral Economics
 chapter 5 Mineral Demand The Theory in Practice
Income elasticity of mineral demand in the
short run
Income elasticity of demand is a measure of the
sensitivity of demand to changes in consumers income.
It is the percentage by which demand will change if
consumers incomes change by one per cent, all other
things being equal. Its simple formula is:
% change in quantity demanded
Income elasticity of demand
% change in income
For many products, as income rises, demand
increases. Goods and services with income elasticities
above one are called income elastic. The demand for
many minerals is income elastic. This is a direct result
of the demand for final products being income elastic.
These final products things such as automobiles,
houses and refrigerators are items that consumers
are more inclined to buy during economic upturns.
Purchases of these durable goods (often also known as
discretionary goods) usually increase when consumers
feel wealthier.
However, the demand for some minerals such as
crude oil and industrial minerals are income inelastic7.
Consider, for instance the demand for residential
electricity as compared to gold jewellery8. Purchasing
gold jewellery is more of a discretionary purchase than
purchasing electricity for home use. Accordingly, we
expect the demand for electricity to be income inelastic
and the demand for gold jewellery to be income elastic
(see Figure 5.8).
Quantity Quantity
demanded demanded
Normal good:
Normal good:
income inelastic
income elastic
Income/period Income/period
Fig 5.8 - Income elasticities of demand.
Resource economists commonly apply the concept
of income elasticity of demand to analyse the
effect of changes in national income levels using
measures such as Gross Domestic Product (GDP)
on the demand for minerals. For example, they may
investigate how changes in national income influence
iron ore demand. Year-to-year instability in a countrys
mineral consumption is due, in part, to the strong link
7 The demand for a mineral is income inelastic if the ratio of the change in quantity
demanded resulting from a one per cent change in income is between zero and one.
Income elastic goods have a ratio greater than one.
8 Data show that non-monetary demand for gold is income elastic and the demand for
residential electricity is strongly income inelastic (Pulvermacher, 2005; Fell, Li and
Paul, 2010).
Mineral Economics
between mineral demand and the state of its economy,
particularly its investment spending. Large fluctuations
in investment are often considered the driving force
of business cycles measured by fluctuations of
GDP over time. Expansions and booms are generally
characterised by high levels of investment, whereas
troughs are generally characterised as low investment.
During economic downturns mineral demand is
commonly low as investment spending on buildings
and structures, transportation equipment, heavy
machinery and consumer durables is greatly reduced.
Conversely, mineral demand is commonly very high
during economic upturns as the consumption of capital
goods and consumer durables swells. This pattern
suggests that, at least in the short run, mineral demand
in most developed countries is strongly income elastic.
For major mineral exporting countries, such as
Australia9, the implications of short-run mineral
demand being income elastic are significant. Generally,
short-run income-elastic mineral demand causes the
mineral demand curve to shift sharply over the business
cycle prompting mineral output, prices, revenues and
profits to fluctuate greatly (Pei and Tilton, 1999). The
resulting volatility can have significant impact on a
countrys management of its macro-economy because
of sudden swings in exchange rates and in tax revenues
from the mining sector (Humphreys, 2000).
In addition, because Australia is a commodity exporter
and an importer of consumer durables and investment
goods, its economy does not always conform to the
general country-level models. Australias mineral sector
is to a great extent linked with the manufacturing,
construction and transportation sectors of other
countries. The International Monetary Fund (2011)
found that a one per cent change in emerging Asias
GDP over the 2000 - 2010 period lead to a 0.33 per cent
increase in Australian GDP10. As a result, the linkage
between income levels and the demand for minerals
in the case of Australia should be examined at a multi-
country scale.
Cross-price elasticity of mineral demand in the
short run
It is also possible to use the concept of elasticity to
indicate the effect of price changes in related products.
The relevant concept here is the cross-price elasticity
of demand. It relates the percentage change in quantity
demanded for a mineral, say gold, with the percentage
change in the price of another mineral, say platinum, all
other things being equal. The simple formula is:
9 This argument applies also to countries such as Chile, as well as many oil exporting
nations and several other mineral dependent developing nations.
10 From 2000 to 2010, Australia benefited significantly from emerging Asias robust
commodity demand. In particular, urbanisation and industrialisation in China and India
boosted demand for commodities, especially iron ore and coal that account for one-third
of Australias exports (International Monetary Fund, 2011).
61
chapter 5 Mineral Demand The Theory in Practice
% change in quantity demanded of good 'A'
Cross price elasticity of demand
% change in price of good 'B'
The cross-price elasticity of demand can be positive or
negative, depending on whether we observe a change
in the price of a substitute or a complement. If the two
minerals are substitutes, an increase in the price of one
will increase the demand for the other, so the cross-
price elasticity will be positive. For example, gold and
platinum can be considered substitutes in the jewellery
market in India (Johnson Matthey, 2009) where the sales
of platinum jewellery are closely linked to the relative
platinum/gold price (Watts, Clarke and Aitlan, 2010).
The surge in platinum jewellery sales in 2008 was, in
part, due to the large decrease in the relative platinum
gold price when platinum lost around 25 per cent of its
value (Johnson Matthey, 2009). Figure 5.9 illustrates a
positive cross-price elasticity of demand for gold with
respect to platinum.
$/unit
Price of palladium, a Price of platinum, a
complement mineral, substitute mineral, rises.
rises. Demand for gold Demand for gold increases.
Positive cross-price
decreases. Negative
cross-price elasticity of elasticity of demand
demand
D1 D2
D0
Quantity of gold/period
Fig 5.9 - Cross-price elasticity of demand.
By contrast, if two minerals are complements, an
increase in the price of one will reduce the demand for
the other; therefore, the cross-price elasticity will be
negative. The demand of 18-carat white gold, which is
an alloy made by mixing 75 per cent gold with 25per
cent other metals, such as silver and palladium, is
sensitive to the prices of gold, silver and palladium
(Gilletts Jewellers, 2004). Therefore, if the price of
palladium rises by 50 per cent, the demand for gold will
decrease, as is illustrated in Figure 5.9.
Cross-price elasticity of demand is a common
analytical tool to identify markets in anti-trust inquiries.
By examining the cross-price elasticity of demand it
is possible to measure how much a firm can raise its
prices without consumers defecting to some substitute
and other firms altering their production processes and
supplying similar products at lower prices. If there are
close substitutes, then the price increase initiated by the
firm will lead to a large reduction in its sales, and its
profits will fall, as a consequence.
The 1956 USA anti-trust case against Du Pont is a
classic example of the use of cross-price elasticity of
62
demand. Du Pont argued that cellophane was not a
separate market, since at prevailing prices its demand
was cross-price elastic, with respect to aluminium
foil, wax paper and polyethylene. This meant that
what seemed to be a single seller or monopoly in the
cellophane market looked like a much more modest
share of the wrappings market. The court found that
Du Pont did not have monopoly power despite control
of 100 per cent of the cellophane market because
cellophane made up only 20 per cent of the wrappings
market (Cueller, 2000).
Elasticity of mineral demand in the long run
Because minerals are inputs in durable and non-durable
final products, from the construction of buildings to the
manufacture of prescription drugs, it is important to
discuss the effect of adjustment time on the elasticities of
mineral demand. Commonly, economists examine only
long-run own-price and income elasticities of demand.
However, over the long run, minerals do exhibit
some cross-price responsiveness because certain
equipment choice decisions include the consideration
of minerals, especially fuel minerals. An example
is the decision to use natural gas instead of electric
water heaters. Some equipment choices are based on
more than just the price of a single mineral and these
results in measurable long-run cross-price elasticities.
Notwithstanding such cases, this discussion of long-
run elasticities is restricted to own-price and income
elasticities of mineral demand.
A significant percentage of industrial minerals are
used in nondurable final products. These include clays
in animal feedstuffs and medicines, as well as limestone
in paper.
Generally, for nondurable final products, the longer
the time that buyers have to adjust, the larger will be the
response to a price change. Accordingly, the demand
for such goods will be more own-price elastic in the
long run than in the short run. Figure 5.10 illustrates
the short- and long-run demand for a nondurable good.
A nondurable final product worth highlighting
is petrol. To the extent that petrol has no short-run
substitutes, the short-run demand is own-price inelastic.
$/unit
long run
demand
short run
demand
Q Q/period
Fig 5.10 - Short- and long-run demand for a nondurable final product.
Mineral Economics
 chapter 5 Mineral Demand The Theory in Practice
The short-run effect of price changes on the quantity
demanded will discourage people from purchasing an
additional car or driving to work. Over time, however,
people will purchase more fuel-efficient automobiles
and find alternative means of transportation.
Accordingly, the demand for petrol will be more own-
price elastic in the long run. The short-term own-price
elasticity of petrol has been estimated to be between
-0.034 to -0.077 (Hughes, Knittel and Sperling, 2008),
and the long-term elasticity has been estimated at -0.46
(Brons et al, 2008). If we combine this information with
the first Hicks-Marshall law mineral demand will be
own-price elastic when the demand for the final product is
own-price elastic the long-run demand for crude oil,
which is used as an input in petrol, will be more own-
price elastic than the short-run demand for crude oil.
Even though many minerals are used in the
manufacturing of nondurable final products, the
predominant use of minerals, especially metals, is as
inputs in the manufacturing of durable final products,
such as motor vehicles. The effect of adjustment time
on the demand for many durable final products is
different than for nondurable final products. Similar to
the demand for nondurable final products, the demand
for durable final products is more own-price elastic
in the long run than in the short run as buyers need
time to adjust to new prices. However, an opposing
effect can lead final-product demand to be relatively
more elastic in the short run. This opposing effect is
especially strong for large changes in income. That is,
the demand for some durable final products tends to
be more income elastic in the short run than in the long
run. As a consequence, the demand for minerals used in
some durable final products is likely to be more income
elastic in the short run than in the long run.
A second example involving motor vehicles illustrates
that the adjustment time for durable final products is
somewhat different than nondurable final products.
Commonly, people purchase new automobiles at
intervals of several years. Now, suppose that there
is a fall in income, referred to here as a decrease in a
persons purchasing power11. Some buyers will defer
their plans to replace their cars, keeping their present
models a little longer. Therefore, a decrease in income
will cause purchases of new cars to fall, all other things
being equal. In the long run, buyers eventually need to
replace their cars and the effect of a decrease in income
may be minimal. As a result, a decrease in income
will cause demand for minerals used in motor cars
to decrease more sharply in the short run than in the
long run. Similarly, if incomes rise, people will replace
their cars more frequently. Therefore, an increase in
incomes will tend to cause demand for minerals used in
automobiles to increase more sharply in the short run
than in the long run.
11 A reduction in a persons purchasing power can be caused by either a decrease in wage
earnings, an increase in inflation without an equivalent increase in wages, or both.
Mineral Economics
Consequently, the difference between short and long
run elasticities of demand for minerals used in durable
products depends on the interaction between the time
needed to adjust to the new final-product prices and the
replacement frequency for the final products.
We have just seen how time can affect the elasticities
of mineral demand. Now let us examine if the nature of
income elasticity of mineral demand over the long term
can help make long-range forecasts about the demand
for minerals. It was concluded above that economic
booms tend to increase the demand for minerals in
the short run; however, prolonged economic growth
that is, continuing increases in the real GDP can
correspond with a decrease in the demand for minerals
per person in the very long run.
Economists commonly make mineral demand fore-
casts by examining a minerals intensity-of-use to a
countrys per capita income. Intensity-of-use reflects the
demand of a mineral (usually measured in physical units
like tonnes) per unit of income discounted over time for
inflation (usually measured in billion dollars of GDP). In
general, a countrys intensity-of-use of a mineral follows
an inverted U-shape when plotted against per capita
GDP. Figure 5.11 shows a representative curve.
tonnes/billion $US of GDP
30
20
10
tonnes
0
0 1000 2000 3000 4000
Per capita GDP ($US)
Fig 5.11 - Intensity-of-use curve.
Tilton (2003) identifies the two factors that cause
this U-shape of intensity-of-use curves as changes in
the product composition of income and changes in
the mineral composition of products. Changes in the
product composition of income occur because of changes
in consumer preferences as per capita incomes rise. At
low levels of development (low levels of per capita
GDP), when subsistence agriculture predominates,
mineral use tends to be minimal. Urbanisation and
industrialisation propels an increase in mineral
demand to build basic infrastructure such as roads,
railways, bridges, factories, pipelines and power grids.
As development continues (per capita GDP increases
further), the need for basic infrastructure declines
the replacement frequency for basic infrastructure is
very low and consumer demand shifts increasingly
towards services and nondurable final products,
which are less mineral-intensive. The transition from
a manufacturing-based economy to a service-based
economy slows and eventually reverses the trend of
consumption of minerals as a function of income.
63
chapter 5 Mineral Demand The Theory in Practice
The mineral composition of products refers to the
amount of minerals used to produce particular goods
or services. The changes in the material composition
of products are driven by material substitution and
technological advancement. One major caveat of the
relationship shown in Figure 5.11 is that per capita
GDP is not a reasonable proxy for the underlying forces
technological progress that determine the trend
in changes in the material composition of products.
This trend is more likely correlated with time than
with income. As a result, the inverted U-shape is not
stable, but rather typically shifts downward over time
(Guzman, Nishiyama and Tilton, 2005). Therefore,
there is no simple relationship between long-run
mineral demand and income. The true relationship is
complicated by a complex interaction between price
differences between materials, technological change,
material life-cycles, consumer tastes, changes in lifestyle
and other such factors (Campbell, 1985).
The Japanese economy provides a clear example of a
change in the product composition of income. In 1984,
for every inflation-adjusted billion yen of industrial
production, Japan consumed only 60 per cent of the
raw materials that were consumed for the same volume
of industrial production in 1973 (Drucker, 1986). This
trend corresponded to the switching away from heavily
material-intensive products to more high-technology
products.
The change in the material composition of products
is clearly visible with the trend towards more use of
aluminium and plastics and less steel in automobiles.
In 1960, an average US domestic automobile consisted
of two per cent aluminium and one per cent plastics,
while in 2008 these percentages had increased to six and
one-half per cent for aluminium and eight per cent for
plastics (Kandelaars and van Dam, 1998; Davis, Diegel
and Boundy, 2010). The substitution of aluminium and
plastics for steel in automobiles has caused a reduction
in the use of steel per automobile produced.
Today, economists are using the intensity-of-use
approach to forecast mineral demand in China and
India. For example, Wrrel and Olsson (2009) used this
approach to determine where both India and China
were on the intensity-of-use curve in 2008.
CONCLUSIONS
As demonstrated in this chapter, most minerals
are demanded as inputs for final products, such as
automobiles, buildings, transportation infrastructure,
mobile telephones and jewellery. As a result, there are
characteristics of mineral demand that are different
from usual final-product demand. In particular,
mineral demand is strongly dependent on existing
production technologies as well as on competing and
complementary inputs of production. Furthermore, the
demand for minerals depends on changes in demand
for final products, changes in technology and changes
in the mix of inputs.
64
The chapter also demonstrated that elasticity of
mineral demand is important from the standpoint of
understanding the magnitude of changes in mineral
demand caused by changes in price, income and the
prices of related products. The short-run demand
for most minerals is own-price inelastic because
manufacturers and consumers that use minerals as inputs
are constrained by their existing plants, equipment and
vehicles. Also, the short-run demand for most minerals
is strongly income elastic as a result of high demand
for final products being strongly income elastic. As the
demand for most minerals is own-price inelastic and
income elastic, many minerals having steeply sloped
demand curves that experience significant shifts over
the business cycle. Two important consequences of these
features are severe fluctuations in the market prices of
minerals and profits for mineral industry firms.
To complete the discussion of elasticity of mineral
demand it is important to examine the effects of time.
Mineral demand tends to be more own-price elastic over
the long run because buyers have more time to adjust
their behaviour. Also, the demand for some minerals
the ones used as inputs in durable final products are
likely to be more income elastic in the short run than in
the long run.
Finally, this chapter has demonstrated that the
demand for minerals is multifaceted. Understanding
the demand side of the mineral markets is essential
for both analysts and policymakers so that they can
understand the economic implications of changes in
mineral markets.
REFERENCES
Brons, M R E, Nijkamp, P, Pels, E and Rietveld, P, 2006. A
meta-analysis of the price elasticity of gasoline demand:
A system of equations approach, Tinbergen Institute
discussion paper TI 2006-106/3.
Campbell, G A, 1985. Theory of mineral demand, in Economics
of the Mineral Industries, fourth edition (ed: W A Vogely)
(American Institute of Mining, Metallurgy, and Petroleum
Engineers: New York).
Cueller, S S, 2000. Is Microsoft a monopoly? Sonoma State
University Working Paper.
Davis, S C, Diegel, S W and Boundy, R G, 2010. Transportation
Energy Data Book, Edition 29 [online]. Available from:
<http://info.ornl.gov/sites/publications/files/pub24318.
pdf> [Accessed: 11 July 2011].
Drucker, P F, 1986. The changed world economy, Foreign
Affairs, 63(4):768-791.
Ducker Worldwide, 2008. Aluminium Association auto and
light truck group 2009 update on North American light
vehicle aluminium content compared to the other countries
and regions of the world Phase II [online]. Available from:
<http://www.drivealuminum.org/research-resources/
PDF/Research/2009/2009-Ducker-Report.pdf> [Accessed:
4 July 2011].
Dulay, N, 2004. Fiber optic interconnections within computer
systems [online]. Available from: <http://www.doc.
ic.ac.uk/~nd/surprise_97/journal/vol3/si1/answer.html>
[Accessed: 24 June 2011].
Mineral Economics
 chapter 5 Mineral Demand The Theory in Practice
Eriksson, R, 2003. The effects of deregulating prices for dental
services, Swedish Institute for Social Research working
paper.
European Bank of Reconstruction and Development, 2002.
Transition report 2001: Energy in transition, European
Bank of Reconstruction and Development, London.
European Copper Institute, 2008. The development of
renewable energies is stimulating demand for copper in
Europe [online]. Available from: <http://www.eurocopper.
o r g / f i l e s / p r e s s _ r e l e a s e _ c o p p e r _ i n _ r e n e wa b l e s _
final_29_10_2008.pdf> [Accessed: 26 January 2012].
Federal Statistical Office of Germany, 2011. Share of
renewable energy sources in gross consumption of
electricity and primary energy from 1991 [online].
Available from: <http://www.destatis.de/jetspeed/
portal/cms/Sites/destatis/Internet/EN/Content/Statistics/
Energie/Tabellen/Content50/ErneuerbareEnergie.psml>
[Accessed: 2 June 2011].
Fell, H, Li, S and Paul, A, 2010. A new look at residential
electricity demand using household expenditure data,
Resources for the Future discussion paper, 10-57.
GFMS Limited, 2004. Publication of platinum and palladium
survey 2004 [online]. Available from: <http://www.gfms.
co.uk/Press%20Releases/GFMS_PGMsurvey04_PR_
Highlights.pdf> [Accessed: 3 August 2004].
Gilletts Jewellers, 2004. White gold versus platinum: White
gold and platinum information [online]. Available from:
<http://gilletts.com.au/information.php?info_id=13>
[Accessed: 11 July 2011].
Grytten, J, 2005. Models for financing dental care, Community
Dental Health, 22:75-85.
Guzman, J I, Nishiyama, T and Tilton, J E, 2005. Trends in the
intensity of copper use in Japan since 1960, Resources Policy
30(1):21-27.
Haynes, B, 2011. Costly Chile power may jolt renewable
energy, Reuters, February 10.
Hicks, J R, 1966. The Theory of Wages, second edition
(St Martins Press: New York).
Hughes, J E, Knittel, C R and Sperling, D, 2008. Evidence of a
shift in the short-run price elasticity of gasoline demand,
The Energy Journal, 29(1):113-134.
Humphreys, D, 2000. Mining as a sustainable economic
activity, paper presented at the OECD, Paris, 9 February
2000.
International Monetary Fund, 2011. Regional economic
outlook, Asia and Pacific, Washington.
Johnson Matthey, 2009. Platinum jewellery demand surging
in India [online]. Available from: <http://www.platinum.
matthey.com/news-and-events/news-articles/2009/
january/22nd/platinum-jewellery-demand-surging-in-
india> [Accessed: 11 July 2011].
Kandelaars, P and van Dam, J D, 1998. An analysis of variables
influencing the material composition of automobiles,
research memorandum 1998-51S Amsterdam Free
University.
Loferski, P J, 2011. Personal communication, 7 June 2011.
Manning, W G and Phelps, C E, 1978. Dental care demand:
Point estimates and implications for national health
insurance, Rand Corporation document No R-2157-HEW.
Marshall, A, 1920. Principles of Economics, eighth edition [online]
(Macmillan: London). Available from: <www.econlib.org/
library/Marshall/marP1.html> [Accessed: 4 July 2011].
Mineral Economics
Mill, J S, 1863. Ulitarianism [online]. Available from: <http://
www.utilitarianism.com/mill2.htm> [Accessed: 4 July
2011].
Mitchell, G D, no date. Coal utilization in the steel
industry [online]. Available from: <http://www.
steel.org/Making%20Steel/How%20Its%20Made/
Processes/Processes%20Info/Coal%20Utilization%20
in%20the%20Steel%20Industry.aspx> [Accessed:
24 June 2011].
Otnes, C C and Pleck, E H, 2003. Cinderella Dreams: The Allure of
the Lavish Wedding (University of California Press: Berkeley).
Pei, F and Tilton, J E, 1999. Consumer preferences, technological
change, and the short-run income elasticity of metal
demand, Resources Policy, 25:87-109.
Pequignot, J L, 2010. Creating an engaging tradition: NW Ayer
& Son and De Beers advertising campaigns in the United
States from 1939 to 1952, Masters of Arts thesis, Miami
University.
Platts, 2004. Country profiles Kazakhstan [online]. Available
from: <http://www.platts.com/Electric%20Power/Resour
ces/News%20Features/worldcap/kazakprofile.html>
[Accessed: 5 August 2004].
Pulvermacher, K, 2005. What are commodities? [online].
Available from: <http://www.gold.org/download/pub_
archive/pdf/what_are_commodities_0305.pdf> [Accessed:
4 June 2011].
Tilton, J E, 2003. On Borrowed Time? Assessing the Threat of
Mineral Depletion (Resources for the Future: Washington).
United States Commodity Futures Trading Commission,
2011. Futures only reports [online]. Available from: <http://
www.cftc.gov/MarketReports/CommitmentsofTraders/
HistoricalCompressed/index.htm> [Accessed: 30 May
2011].
United States Energy Information Administration, 2003.
Kazakhstan country analysis brief [online]. Available from:
<http://www.eia.gov/countries/country-data.cfm?fips=kz>
[Accessed: 5 August 2004].
Venkatesh, R, 2002. Indias consuming interest in silver,
Alchemist, 28.
Ward, C, 1990. The production of synthetic rutile and by-
product iron oxide pigments from ilmenite processing, PhD
thesis (unpublished), Murdoch University, Perth, Western
Australia.
Wrrel, L and Olsson, A, 2009. Trends and developments in the
intensity of steel use: An econometric analysis, presented
at Securing the Future and 8th ICARD, Skellefte, Sweden,
23 - 26 June.
Watts, J C, Clarke, B and Aitlan, O, 2010. Jewellery shocks
from China and India, paper presented to the Fourth
International Platinum Conference, The Southern African
Institute of Mining and Metallurgy, Sun City, South Africa,
11 - 13 October.
Wiesmann, G, 2011. Germany to scrap nuclear power by 2022,
Financial Times, 30 May.
World Bank, 2011. China: GNI per capita, Atlas method
(current US$) [online]. Available from: <http://search.
worldbank.org/data?qterm=china%20gni%20per%20
capita&language=EN> [Accessed: 1 June 2011].
World Gold Council, 2011. Gold demand trends: First quarter
2011.
65