1. DETROIT -- Here's a million-dollar question: How does the global economy connect American car buyers and Russian bureaucrats?
One person who can answer is Reg Modlin, an emissions specialist at DaimlerChrysler AG's U.S. unit. Mr. Modlin, like many other auto-industry executives worldwide, has spent the past several weeks fretting about the soaring price of an obscure, grayish metal called palladium. Many people haven't even heard of it, but for anyone who wants to make a cleaner car or sport-utility vehicle, the precious metal is a must-have. Too bad the main source of the stuff is Russia.
The Price of an Ounce
Last month, concerns that political infighting in Moscow might choke future supplies drove the price of palladium to nearly $1,000 an ounce. Although there is less than an ounce of palladium in most vehicles -- it is used inside the catalytic converter -- that kind of price surge means palladium suddenly is becoming a big-ticket item for auto companies. Car makers brought much of this on themselves. In the mid-1990s, they agreed to accelerate their adoption of tighter national emission standards as part of a deal to head off separate state-by-state rules, which would have played havoc with manufacturing and distribution. Palladium looked like the best solution, since it began cleaning exhaust sooner after starting up than platinum, then the dominant metal in catalytic converters. Plus, the price for little-used palladium hadn't gone above $200 a ounce in more than a decade, while platinum had jumped above $400. Following this decision, palladium prices jumped in the late 90's , but remained below $400 an ounce until this year.…However many automakers are projected to have a big increase in palladium consumption in 2000, as they began to roll out models to meet the tighter national emission rules as regulators turn their focus to explosively popular trucks and SUVs, which have been subject to more-lenient rules. Palladium turns out to be particularly good at cleaning their exhaust. Although there is now a huge effort under way at many companies to find ways to use less palladium, changing car designs in that way will take several years.
a)Based on information in the above article is the demand for palladium elastic or inelastic? Explain your answer. i.e. What about palladium and its use in automobile manufacturing creates its high or its low elasticity of demand ?
do a little research, then take a shot. Hint: say the price of palladium doubled, how much less passadium be used? I can think of at least two reasons.
Based on the information in the article, the demand for palladium in automobile manufacturing can be considered relatively inelastic. The article highlights that palladium is a "must-have" metal for making cleaner cars and SUVs due to its ability to clean exhaust and its use in catalytic converters. Additionally, the article mentions that car makers have agreed to adopt tighter emission standards, which further increases the demand for palladium.
Several factors contribute to the relatively inelastic demand for palladium:
1. Unique properties: Palladium possesses specific properties that make it especially effective in cleaning vehicle exhaust. This uniqueness makes it difficult for car manufacturers to substitute it with other metals.
2. Limited supply: The main source of palladium is Russia, creating concerns about potential supply disruptions due to political instability or other factors. The limited supply puts additional pressure on the demand for palladium.
3. Time and cost of development: The article notes that efforts are underway to find ways to use less palladium. However, changing car designs and developing alternative solutions take time and significant investment. This constraint makes it challenging for car manufacturers to quickly switch to alternatives, reinforcing the inelastic nature of demand.
Overall, the combination of the essential role of palladium in emissions control, limited supply, and the time and cost required to find alternatives contribute to the relatively inelastic demand for palladium in automobile manufacturing.