Economic Impact Australian Mining Boom

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. 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 family car in Australia is 1.4. What will be
the effect of mining boom on the demand for cars?

Income elasticity takes into account a measure of the magnitude of responsiveness of the demand of a commodity to changes in income. The income elasticity of a mid-sized family car in Australia is 1.4. Since the demand is greater than one, it is income elastic. This implies that the quantity demanded changes more than proportionately in reaction to a given change in income. Taking into consideration that the mining boom causes an increase in the household income in Australia, it implies that there will be an increase in the demand for cars because more families will be able to afford such cars and therefore demand to purchase more owing to the income elasticity (Dwivedi, 2002).

AQ5 The price of iron ore in 2010 was about US $145 per dry metric ton in the international market compared to about US $110 per dry metric ton in the domestic market in Australia, and Australia exported about US $46 billion worth of Iron Ore that year. Explain Australia’s gains from a welfare perspective. Use an appropriate diagram to explain your answer
As an exporter of the iron ore to the international market, Australia made gains to the market owing to the increased price in the international market. The diagram below indicates the comparative advantage that Australia gained from a welfare perspective.

As illustrated in the diagram below, the gains made by Australia from a welfare perspective takes into account the difference in the price of the iron ore in the domestic market, which is set at $110 and the price of the commodity in the international market, which is set at $146. Since the commodity prices are higher internationally, the welfare gain will be centered on the equilibrium of the level of demand and supply in the international market.

AQ6 In 2010, the minimum wage in Australia was A$ 15. What may have been the likely impact of this minimum wage policy in the Australian mining industry? Graphically explain your answer

The minimum wage rate within the market is the minimum amount of money that is paid to the worker or employee within the industry. In the course of the mining boom, the minimum wage rate increase and in 2010 the minimum wage in Australia was A$

15. The increase in minimum wage policy likely had an impact on the marginal factor cost and the average revenue product curve. The marginal factor cost is the change in the total cost emanating from the employment of one more or one less unit of the variable factor. The illustration below delineated the demand curve for labor within the Australian mining industry:

In the diagram above, it is assumed that the prevailing wage rate within the industry is determined by the market, and therefore the firms will continue to employ extra labor up until Q* as this will increase more revenue as compared to costs. Going further than this level will give rise to greater marginal revenue product and will therefore not be hired.

As illustrated in the diagram above, at a higher wage rate W1, which in this case is $15 it implied that firm in the mineral industry employed fewer workers. Notably, the marginal revenue product curves provides insight as to how much labor will be demanded at any particular wage or price. Therefore, the increase in the wage rate to $15 will give rise to a decrease in the quantity of the labor employed to Q1 as demonstrated above (McEachern and Lunn, 2006).

AQ7 Suppose, during the boom, the Chief Economist at the Australian Bureau of Agricultural and Resources Economics and Sciences (ABARES) was given the task of evaluating the implications of the imposition of a tax on the production of mineral ores in Australia. If the mineral ore market was already operating at a socially optimum level, explain the welfare implication of the proposed tax that should be included in the economist’s recommendations. Use diagram to explain your answer
In delineation, the social welfare resulting from the production as well as consumption of a certain amount of a commodity is the summation of the surplus from the producer, surplus from the consumer, together with any taxation revenue that is taken up by the government. Notably, the imposition of a tax on the production of mineral ores in Australia would be purposed to increase the revenue generated by the government. This can be attained through a direct tax from the standpoint of welfare.

The imposition of a tax, there will be an increase in the price of the commodity. Owing to the increase in the price of the commodity, it is expected for the line price to shift to a new point PL2, which is tangential to an indifference curve IC1. Without a doubt, when tax is imposed on the commodity, it implies that the consumers will move from an indifference curve is that is higher to one that is lower. The inference of this is that the welfare will decrease taking into account that the mineral ore market was already operating at a socially optimum level. It is imperative to note that the movement of the indifference curve that is higher to one that is lower is owing to the income effect as well as the substitution effect that is caused by the taxation (McEachern and Lunn, 2006).

AQ8 Suppose Australia’s iron ore producers join together to become a single seller. With the aid of a diagram, illustrate and explain the firm’s profit maximizing output and pricing decisions in the iron ore market
In the supposition that Australia’s iron ore producers join together to become a single seller, this creates a monopoly. In delineation, a monopoly is a market structure where the production is under the control of a sole supplier. Taking into consideration that the monopolist is the only source of supply within the marketplace, it is imperative to note that the demand curve is also perceived as the industry demand curve. The inference of this is that the monopolist experiences a downward sloping demand in the sense that if the monopolist purposes to retail more, then he must decrease the price.

The competitive industry level of output is signified by Q and the corresponding price signified by P. The merger of Australia’s iron ore producers join together to become a single seller is expected cause supernormal profits, which are represented by the area PCAB. Being a monopoly, these profits are expected to go on in the long run owing to the reason that there will be no form of barriers of entry into the mineral industry. In the long run, the firm will be able to expand to any level that will maximize profits. Firm maximization for this case will have its profit maximizing level of output at the point where the marginal revenue is equivalent to the marginal cost (McEachern and Lunn, 2006).