Aluminum Industry In 1994

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Pages: 9
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Aluminum Industry in 1994: Building the Short Run Supply Curve
Managerial
Economics
Alp
Atakan

This material is for the exclusive use in MGEC classes at Koc University. No other use is allowed without my permission.

1

Trading Aluminum Ingot on the LME:
An Illustration
•

During a typical trading period in the “ring” on the London Metal Exchange (LME), suppose that there are 6 potenRal buyers of aluminum contracts and 6 potenRal sellers of aluminum contracts (on the LME, each contract contains 25 tons of aluminum), with the following characterisRcs:

Poten@al
Buyer
#1
#2
#3
#4
#5
#6

•
•
•

Highest price buyer is willing to pay (“B”)
($
per ton)
$

1,600
$

1,500
$

1,300
$

1,200
$

1,100
1,000
$

Poten@al
Seller
#1
#2
#3
#4
#5
#6

Lowest price seller is willing to accept (“C”)
($
per ton)
$

7 00

$ 8 00

$ 9 00

$

1,100
$

1,200
1,300
$

A buyer only knows his/her own “B”; a seller only knows his/her own “C”
Buyers
would like “buy low.” Sellers would like to “sell high.”
What
transac@ons will take place? At what price?
2

What Does Microeconomics Predict About the Number of Trades and the Prices at which Trades Take Place?
$
per ton

$ per ton

1700

1700

1600

1600

1500

1500

1400
1300

Poten@al sellers in “merit order”

Poten@al buyers in “merit order”

1400
1300

700

700

600

600

300
200
100
0

Poten&al seller #2

400

Poten&al seller #1

500

1

2

3
4
5
Quan&ty
(contracts)

500
400
300
200
100

6

0

1

2
3
4
Quan&ty
(contracts)

Poten&al buyer #6

800

Poten&al buyer #5

800

Poten&al buyer #4

900

Poten&al buyer #3

900

Poten&al buyer #2

1000

Poten&al buyer #1

1000

Poten&al seller #6

1100

Poten&al seller #5

1100

Poten&al seller #4

1200

Poten&al seller #3

1200

5

3

6

Price ($ per ton)

Trading Aluminum Ingots on the LME:
Theoretical Prediction
1700

•

1600

Equilibrium quanRty: 4 contracts will be traded

•

Equilibrium price: between $1,100 and $1,200 per ton

1500

Supply Curve

1400
1300
1200
1100

Demand Curve
• What will actually happen in the trading pit?

1000
900
800

✓

700
600

✓
✓

500
400

✓

300
200

✓

100
0
0

1

2

3

4

5

Quan&ty (contracts)

6

Remember: in the pit, no one knows these curves!
Freewheeling
negoRaRon!
PotenRal
buyers call out prices at which they are willing to buy
PotenRal
sellers call out prices at which they are willing to sell.
Trade
prices are posted publicly

7

4

Aluminum Smelting is a Perfectly Competitive Market
•

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