In 2022, the price of lithium carbonate reached record highs, mimicking the volatility of critical copper markets. While mineral supply is finite and mining operations take years to commission, why have prices risen so precipitously? Producers have attempted to expand output, but global demand has scaled at a much faster rate.
Lithium is a core component in rechargeable lithium-ion batteries. In rapidly developing nations like India, urbanisation and rising middle-class incomes have accelerated the purchase of consumer electronics and electric two-wheelers. Because the income elasticity of demand for electronics and personal transport is positive, rising GDP directly translates into a rightward shift in the demand for battery materials.
A second crucial factor pushing up lithium prices is state-backed industrial policy. Legislation such as the US Inflation Reduction Act and EU net-zero mandates have heavily incentivized electric vehicle (EV) manufacturing. Between 2018 and 2023, the volume of lithium allocated to domestic automotive battery production in North America grew by over 350 per cent. Furthermore, over 30 countries have pledged to phase out internal combustion engines entirely by 2035, structurally shifting the demand curve for battery-grade lithium.
With the help of a demand and supply diagram and using the information in Extract B, explain why the price of lithium rose significantly up to 2022.
256 exam-style questions on AQA A Level Economics 1.3 Price determination in a competitive market, covering 1.3.1 The determinants of the demand for goods and services, 1.3.2 Price, income and cross elasticities of demand, 1.3.3 The determinants of the supply of goods and services, 1.3.4 Price elasticity of supply, 1.3.5 The determination of equilibrium market prices, and 1.3.6 The interrelationship between markets. Each one has a worked solution and a mark scheme showing where the marks go.