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MAE101 Economic Principles

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Microeconomic Implications of the Australian Mining Boom

Mining has been traditionally contributing to the Australian economy since around the mid nineteenth century, with Silver and Copper discovered in South Australia, followed by discovery of other minerals including Iron, Coal, Gold and Uranium which led to a significant rise in the export of these minerals, as well as migration of people from various parts of the world over time. Over the past years, Australia has experienced a number of extended periods of increased mining output, with the latest mining boom occurring at the outbreak of the twenty first century, lasting for about 10 years. With the advent of the new millennium, as Australia started to discover new mineral resources including those of iron ore and coal, there was also a massive surge of demand for these minerals from fast growing economies such as China, causing the prices of minerals to generally rise. Over the period of Australia’s recent mining boom from 2002 to 2012, mining exports more than tripled and mining investment as a proportion of GDP increased from 2 per cent to 8 per cent. Real household disposable income and real wage increased by 13 per cent and 6 per cent, respectively with unemployment falling by about 1 and a quarter percentage points. The growth in the mining production and exports also led to large appreciation of the Australian dollar with some limited impact on the firms in other industries such as manufacturing and agriculture.

In this part for the assignment, you will analyse the possible implications of the Australian mining boom for households, firms and public policies.

You need to answer the following questions with clear descriptions using your knowledge of microeconomics.

Q1a. Use a diagram to show and explain how equilibrium prices and quantities in the mineral ore market change due to the mining boom.

Q1b. Explain the possible effect of the mining boom on the Australian housing market. Use diagrams to elaborate your answer.

Q2. 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.

Q3. 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.

Q4. 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?

Q5. 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.

Q6. 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.

Q7. 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.

Q8. 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 maximising output and pricing decisions in the iron ore market.

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