IB Economics – Internal assessment summary portfolio
cover sheet
School code
Name of school
(redacted)
(redacted)
Candidate number: (redacted)
Candidate name: (redacted)
Candidate name
(redacted)
Candidate number
(redacted)
Teacher
(redacted)
Title of the article
Brazil’s Vale 1Q Iron-Ore Output a Record
Source of article
The Wall Street Journal
Date the article was published
April 22, 2015
Date the commentary was
written
June 10, 2015
Word count (750 words
maximum)
737
Section of the syllabus
Please tick the one that is most
relevant
 Section 1: Microeconomics
 Section 2: Macroeconomics
 Section 3: International economics
 Section 4: Development economics
Commentary
Demand is the economic concept that relates the desires of a consumer and the readiness
to pay a price for any specific good or service. Supply is defined as the quantity of a product
that producers are ready to sell at a certain price. Market disequilibrium occurs when the
demand and supply for a certain good or service at a certain price point are not equal. This
leads to either excess demand or excess supply with excess supply meaning more of a good
is supplied than demanded and excess demand meaning that there is more demanded of a
certain good than what is being supplied.
Vale has increased its output despite a lower demand for metals in the global market. The
company’s increased production for metals is aided by ores that have been bought from
other firms. This has lead to an increase in the output of iron ore which has increased the
company’s output of more profitable commodities like iron-ore pellets. Vale’s opening of a
new mine in the Brazilian Amazon also contributed to increasing the firm’s output of metals
in the market.
The shift to the right from S1 to S2 represents Vale’s increased productivity due to the
newly opened mine. This shift means that at every price point there is more of that quantity
being supplied. However, due to demand remaining the same, there is excess supply. The
excess supply is the shaded triangle. This is because at the same price point P1, there is
more produced and this is seen at Q3. The demand for iron ore has remained the same at
Q1 which corresponds with the same initial price point of P1. Equilibrium 1 represents the
point where demand and supply were initially equal at a price point of P1 and a quantity
level of Q1.
Vale’s increase in supply is due to an increase in one of the determinants of supply, which
are costs of production, productivity, government intervention, price of related goods and
supply shocks. Productivity has increased due to the opening of a new mine meaning that
more iron ore can be supplied into the metals market. However, due to the fall in demand
for metals in the market, Vale’s increased output will cause market disequilibrium and
excess supply as shown in the graph. This is because global demand for metals has not
changed but Vale is supplying larger quantities of iron ore at the same prices. This difference
in demand and supply leads to excess iron ore being produced as not all of it is purchased by
consumers.
To address the surplus, Vale can choose one of two options. The first is that they store the
excess supply since iron ore is a commodity and not perishable. This way Vale will be able to
keep its prices the same and maintain its revenue. The stored iron ore can subsequently be
sold on the market any time in the long run due to it being a commodity and consumers will
not be put at a disadvantage due to prices remaining the same. However, on top of costs of
production, the cost of storage will increase Vale’s total costs which may reduce their
revenues despite prices remaining the same.
They can also choose to decrease prices for ore which will aim at increasing demand for ore
and reducing the excess supply. Lower revenues may be a disadvantage to Vale but higher
demand from consumers may compensate for the low prices. Consumers will benefit in this
case due to lower prices as well. Vale will also not need to worry about storage costs if they
choose to decrease prices.
Vale’s best option would be to lower its prices for iron ore. As seen on the graph, Vale
lowering its price to P2 in the long run will increase demand to Q2 and will allow for
equilibrium to be reached as shown by Equilibrium 2.
For Vale, lowering prices is more beneficial as it eliminates the cost of storage of the surplus
iron ore. Higher demand could also compensate for the lower prices meaning Vale’s total
revenue may not be affected too substantially. Consumers will also benefit from the lower
prices by having the ability to now purchase more iron ore. Overall, Vale’s increase in output
leading to an excess of supply could be beneficial to the economy and itself as it could lead
to increased revenue and more demand from consumers.