Economic Impact Australian Mining Boom Case Study

Tags: australia comparative advantage economic theory mineral minimum wage mining revenue welfare

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Summary



In the period between 2002 and 2012, Australia experienced a mining boom; a period in which the level of exports increased more than threefold and also the investment made in mining as a percentage of the nation’s GDP increasing from 2 percent to 8 percent. Imperatively, during the mining boom period, there was a significant increase in demand for minerals. This is because of the demand for minerals not only locally but also internationally. Therefore, this caused a rightward shift in the demand curve. This leads to the positioning of a new equilibrium price. The comparative theory best explains the exportation of minerals by Australia and the importation of other commodities from other nations. In this regard, Australia is considered to have a comparative advantage in the production of minerals because it can produce minerals at a relatively lower opportunity cost compared to China. Another aspect that was influenced during the mining boom is the minimum wage. In the period, the minimum wage increased and in 2010 the policy set the price at $15. The marginal revenue product curves provides insight as to how much labor will be demanded at any particular wage or price. The increase in minimum wage gave rise to a decline in the number of employees that can be hired and therefore a decline in the labor force. In the event that the firms in the industry join forces into one particular firm for producing minerals, it is expected that there will be monopoly. The inference of this is that in the short term it will give rise to supernormal profits.



AQ1a. Use a diagram to show and explain how equilibrium prices and quantities in the mineral ore market change due to the mining boom.



During the mining boom, there is a significant increase in the demand for minerals. In the diagram above, DD is considered to be the original demand curve of the minerals prior to the boom with Pe and Qe being the equilibrium price and quantity respectively. However, once the mining boom kicked in, there was an increase in the amount of demand, causing a rightward shift to the demand curve. Therefore, as illustrated in the diagram above, the demand curve moves from DD towards D1D1. This also causes an increase in the quantity supply, which causes a novel equilibrium price to be P1 (Lipsey and Harbury, 1992).

AQ1b. Explain the possible effect of the mining boom on the Australian housing market.

Use diagrams to elaborate your answer



The mining boom also had an impact on the Australian housing market. Notably, the mining boom is expected to have increased the income on households or individuals. Therefore, there is an increase in the demand for more housing. In the same case, it is expected that the supply would also increase in order to satisfy the increase demand from income for savings and investments in households. This is bound to change the equilibrium price and quantity.

The diagram below illustrates the shift in demand and supply curves:



AQ2. Which economic theory helps explain Australia’s export of minerals during the mining boom to overseas, say to China, and imports of televisions from China? Explain your answer



The economic theory that helps to elucidate Australia’s export of mineral in the course of the mining boom to overseas, for instance, to China, and imports of televisions from China is the comparative advantage theory. Basically, a nation has a comparative advantage over other nations if in the production of a commodity it can lower opportunity cost in terms of foregone substitute products that could be produced.

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For instance, in this case, there are two nations, Australia and China producing two different commodities being minerals and televisions respectively. Australia is considered to have a comparative advantage in the production of minerals because it can produce minerals at a relatively lower opportunity cost compared to China. This implies that its absolute margin is greater or that its absolute disadvantage is lower in minerals than in televisions. In the same manner, China is considered to have a comparative advantage in the production of televisions because it can produce televisions at a relatively lower opportunity cost compared to Australia. This implies that its absolute margin is greater or that its absolute disadvantage is lower in televisions than in minerals (Mankiw, 2014).



AQ3 Suppose there has been an advancement in wheat farm technology during the mining boom. What will be the effect of this technical advancement, ceteris paribus, on the market for bread? If you are the owner of a bakery, what would be effect of this market outcome on your bakery’s revenue? Explain why your bakery may not necessarily be better off after the technical advancement in farm technology. Use appropriate diagrams where necessary.



The consideration in this regard is the price demand elasticity. In definition, the price elasticity of demand takes into account a measure of the magnitude of responsiveness of the demand of one commodity to a change in its own price. Notably, if the ratio is greater than one, then the demand is elastic. When the ratio declines to smaller than one, the demand becomes inelastic. If the ratio is equivalent to one, then the demand becomes unitary. In the supposition that there has been an advancement in wheat farm technology during the mining boom, the effect of this advancement, ceteris paribus, on the market for bread, would be positive. In particular, this would give rise to an increase in the amount of supply. This is largely for the reason that better technology used in the wheat production is bound to facilitate the ability to not only plant but also to harvest more commodity and therefore increasing the quantity of supply within the market (Dwivedi, 2002).



As an owner of a bakery, the effect of this market outcome on the bakery’s income would also be positive. An increase in supply would be able to increase the number of products being retailed in the bakery and therefore an increase in the revenue generated. However, it is imperative to note that the bakery may not necessarily be in a better position subsequent to the technical advancement in farm technology. This is largely for the reason that the effect is that there will be a shift in the short run supply curve whose position will be reliant on whether the harvest is good or bad. More often than not, the supply curve will have a tendency of being inelastic for the reason that the amount put on the market will be mainly reliant on the size of the harvest. In addition, the short run elasticity of supply is minimal bearing in mind that once a certain amount of crop has been planted, it is relatively difficult to increase or decrease the resulting output. Therefore, regardless of the technology advanced in a certain planting period, this cannot alter the initial amount that was planted and therefore the harvest cannot change (Dwivedi, 2002).



AQ4 Suppose income elasticity of a mid-sized….....

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References

Dwivedi, D.N., 2002. Microeconomics: Theory and Applications. New Delhi: Pearson Education India.

Lipsey, R.G. and Harbury, C., 1992. First principles of economics. Oxford: Oxford University Press, USA.

Mankiw, N.G., 2014. Principles of macroeconomics. New York: Cengage Learning.

McEachern, W.A. and Lunn, J., 2006. Microeconomics: A contemporary introduction. Thomson/South-Western.

 

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