Australia's Mining Boom: Markets, Wages, and Trade Analysis

Introduction and Overview

Between 2002 and 2012, Australia experienced a significant mining boom during which the level of exports increased more than threefold and investment in mining as a percentage of GDP rose from 2 percent to 8 percent. During this period, demand for minerals increased substantially — not only domestically but also internationally — causing a rightward shift in the demand curve and establishing a new equilibrium price.

The comparative advantage theory best explains Australia's exportation of minerals and its importation of other commodities, such as televisions from China. Australia holds a comparative advantage in mineral production because it can produce minerals at a relatively lower opportunity cost than China. The mining boom also influenced the minimum wage, which rose to A$15 in 2010. The marginal revenue product curve provides insight into how much labor will be demanded at any given wage rate; consequently, the minimum wage increase led to a decline in the number of workers that firms could hire. Finally, if all firms in the industry were to merge into a single producer, a monopoly would result, generating supernormal profits in the short run.

Equilibrium Prices and the Housing Market

During the mining boom, demand for minerals increased significantly. In a standard supply-and-demand diagram, DD represents the original demand curve for minerals prior to the boom, with Pe and Qe denoting the equilibrium price and quantity respectively. Once the boom began, the rise in demand caused a rightward shift of the demand curve from DD to D1D1. This shift also increased the quantity supplied, establishing a new equilibrium price of P1 (Lipsey and Harbury, 1992).

The mining boom also affected the Australian housing market. The boom increased household incomes, which in turn increased the demand for housing. At the same time, supply was expected to rise in order to meet this increased demand — driven by higher savings and investment capacity among households. These combined movements altered the equilibrium price and quantity in the housing market. A diagram illustrating such a scenario would show both the demand curve and the supply curve shifting rightward, with the resulting equilibrium depending on the relative magnitudes of each shift.

Comparative Advantage and Trade Theory

The economic theory that best explains Australia's export of minerals during the mining boom — for instance, to China — and its import of televisions from China is the theory of comparative advantage. A nation holds a comparative advantage over other nations in the production of a commodity if it can produce that commodity at a lower opportunity cost, measured in terms of the foregone alternative goods that could otherwise be produced.

In this case, two nations — Australia and China — each produce two commodities: minerals and televisions. Australia has a comparative advantage in minerals because it can produce them at a relatively lower opportunity cost than China. This means that Australia's absolute margin is greater, or its absolute disadvantage is smaller, in minerals than in televisions. Conversely, China has a comparative advantage in television production because it can produce televisions at a lower opportunity cost than Australia — its absolute margin is greater, or its absolute disadvantage is smaller, in televisions than in minerals (Mankiw, 2014). This mutual specialization forms the basis for mutually beneficial trade between the two countries.

Elasticity: Wheat Technology, Cars, and Welfare Gains

Price elasticity of demand measures the responsiveness of quantity demanded to a change in a good's own price. When the elasticity ratio exceeds one, demand is elastic; when it is below one, demand is inelastic; and when it equals one, demand is unitary. Assuming an advancement in wheat farm technology during the mining boom, the ceteris paribus effect on the bread market would be positive. Specifically, better technology in wheat production enhances the ability to plant and harvest more, thereby increasing the quantity supplied in the market (Dwivedi, 2002).

As a bakery owner, the effect of this market outcome on revenue would also initially appear positive: more supply means more product available for retail and therefore potentially higher revenue. However, the bakery may not necessarily be better off following the technological advance. The short-run supply curve's position depends on whether the harvest is good or bad. The supply curve for agricultural produce tends to be inelastic in the short run because the quantity brought to market depends mainly on the size of the existing harvest. Furthermore, once a crop has been planted, it is relatively difficult to increase or decrease the resulting output. Therefore, regardless of any technology introduced during a given planting period, it cannot alter the amount already planted, and the harvest size cannot change as a result (Dwivedi, 2002).

Income elasticity of demand measures the responsiveness of quantity demanded to changes in consumer income. With an income elasticity of 1.4 for a mid-sized family car in Australia, demand is income elastic, since the coefficient exceeds one. This means that quantity demanded changes more than proportionately in response to a given change in income. Because the mining boom increased household incomes across Australia, the demand for mid-sized family cars would be expected to rise — more families would have the financial means to purchase such vehicles, and the income-elastic nature of the good amplifies this effect (Dwivedi, 2002).

In 2010, the price of iron ore was approximately US$145 per dry metric ton in the international market, compared to approximately US$110 per dry metric ton in the domestic Australian market, and Australia exported around US$46 billion worth of iron ore that year. As an exporter to the international market, Australia gained welfare benefits owing to the higher price available internationally. The welfare gain is centered on the difference between the domestic price of US$110 and the international price of US$146. Since commodity prices are higher in the international market, the welfare gain reflects the expanded producer surplus generated by exporting at the higher world price rather than selling domestically at the lower equilibrium price.

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.

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.