Sleepy Art: April 2012

Real life is quite similar to Minecraft.

Diamond supplier De Beers is reporting a much-needed 27% increase in sales for the year 2011 after a sudden rise in demand, particularly in the US, India, and China. De Beers is a group of companies that has dominated the diamond industry since the twentieth century, during which time it engaged in monopolistic practices to manipulate the market in its favor. The market for diamonds currently stands at an oligopoly, meaning it is comprised of just a few businesses.

Before examining the details of De Beers’ supply and demand curves, it is worth noting how diamonds first became popular. Diamonds have been treasured for thousands of years, ever since their discovery in ancient India where they were used to represent religious icons. They were also very popular as engraving tools during ancient times. The market we are currently familiar with, in which diamonds are used as gemstones, appeared during the nineteenth century after increased supply and effective advertising. Product placement along with the memorable slogan “a diamond is forever” helped revive the American diamond market in the twentieth century, making it a popular luxury item.

The sudden increase in sales is especially welcome because the company has faced massive losses in the past few years due to the recession that struck globally. Elasticity helps explain those losses. Diamonds are considered a luxury amongst consumers, as they do not fulfill any basic requirement like food or shelter. Because of that, luxury items are the some of the first to be cut from consumers’ budgets during an economic crisis where disposable income decreases. The graph below represents consumers leaving the market, causing the demand curve to shift to the left.

As we can see, this also causes the equilibrium price, where the supply and demand curves intersect, to decrease. However, this leaves the supplier with excess goods that are costing money to produce, but providing no return. The supplier must act accordingly, in this case, by producing less of the good. De Beers was forced to reduce the number of hours its miners worked, and in some cases, halt mining in various parts of Canada, Botswana, South Africa, and Namibia. Lower production of the good will cause the supply curve to shift to the left as well, reflecting the lower quantity of the item that is being produced.

As nations recover from the global recession, consumers have begun to re-enter the diamond market due to higher levels of disposable income. Not only have more US consumers entered the market, but the increased prosperity and economic stability in China and India has led consumers there to enter the market as well. When buyers enter the market, the demand curve shifts to the right accordingly. To avoid a shortage, the supplier will begin to produce more of the product, causing the supply curve to the right to reflect the sudden increase in quantity. The equilibrium price will increase, as well. In the case of De Beers, it was able to resume standard mining practices. However, De Beers still calls the recent increase in sales “disappointing,” as it does not meet the previously anticipated revenue that would help them recover from the lousy sales in recent years. De Beers must continue to face its few competitors and work to recover from the recession that affected countless businesses.

Works Cited

Epstein, Edward Jay. The Rise and Fall of Diamonds. Simon and Schuster, 1982. Print.

Marais, Jana. "De Beers Sales Increase 27% on Higher Diamond Demand,
Prices." Bloomberg. 10 Feb. 2012. Web. 24 Apr. 2012.

The article used for this analysis can be found here.