Elasticity of Supply · Paper 2 — Free Economics SL Practice Questions

The government of a small island nation, Coralia, is considering a policy to support local fishermen. The market for fresh fish in Coralia is highly volatile. When tourist arrivals spike during festivals, the price of fish can double within a week, but fishermen cannot significantly increase their catch immediately because their boats are limited and fishing grounds are fixed in the short run. Over a year, however, new fishermen can enter the industry and boats can be upgraded. A local economist estimates that a $40\%$ increase in price leads to a $4\%$ increase in quantity supplied in the first month, but a $32\%$ increase in quantity supplied after one year.

The global market for rare earth elements (REEs) is dominated by China, which accounts for approximately $60\%$ of global mining and over $85\%$ of global processing. REEs are essential inputs for manufacturing high-tech products such as electric vehicle (EV) batteries, wind turbines, and smartphones. In 2023, the Chinese government introduced new environmental regulations that significantly increased the cost of mining and processing REEs. Industry analysts estimate that in the short run (first 12 months), global quantity supplied of processed REEs fell by $8\%$ despite a $40\%$ rise in the market price. In the long run (beyond 5 years), new mining projects in Australia, the United States, and Brazil are expected to increase global supply capacity by $35\%$.