52 PART • Introduction: Markets and Prices We have seen how to fit linear supply and demand curves to data Now, to see how these curves can be used to analyze markets, let’s look at Example 2.8, which deals with the behavior of copper prices, and Example 2.9, which concerns the world oil market E XA MPLE 2.8 THE BEHAVIOR OF COPPER PRICES Price (cents per pound) After reaching a level of about $1.00 per pound in 1980, the price of copper fell sharply to about 60 cents per pound in 1986 In real (inflation-adjusted) terms, this price was even lower than during the Great Depression 50 years earlier Prices increased in 1988–1989 and in 1995, largely as a result of strikes by miners in Peru and Canada that disrupted supplies, but then fell again from 1996 through 2003 Prices increased sharply, however, between 2003 and 2007, and while copper fell along with many other commodities during the 2008–2009 recession, 440 420 400 380 360 340 320 300 280 260 240 220 200 180 160 140 120 100 80 60 40 20 the price of copper had recovered by early 2010 Figure 2.20 shows the behavior of copper prices from 1965 to 2011 in both real and nominal terms Worldwide recessions in 1980 and 1982 contributed to the decline of copper prices; as mentioned above, the income elasticity of copper demand is about 1.3 But copper demand did not pick up as the industrial economies recovered during the mid-1980s Instead, the 1980s saw a steep decline in demand The price decline through 2003 occurred for two reasons First, a large part of copper consumption is Nominal Price Real Price (2000$) 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Year F IGURE 2.20 COPPER PRICES, 1965–2011 Copper prices are shown in both nominal (no adjustment for inflation) and real (inflation-adjusted) terms In real terms, copper prices declined steeply from the early 1970s through the mid-1980s as demand fell In 1988–1990, copper prices rose in response to supply disruptions caused by strikes in Peru and Canada but later fell after the strikes ended Prices declined during the 1996–2002 period but then increased sharply starting in 2005