Price Elasticity of Demand and Recent Events Affecting the Mining Industry of Australia

Running head: ECONOMICS
Economics
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1ECONOMICS
Table of Contents
Price elasticity of demand................................................................................................................2
Recent event that affecting mining industry of Australia................................................................2
References........................................................................................................................................5

2ECONOMICS
Price elasticity of demand
In economics, the term price elasticity of demand refers to the proportionate change in
demand of a good due to proportionate change in own price of the good. The analysis of price
elasticity of demand is particularly important to understand direction of change in company’s
revenue due to change in price (Cowell 2018). BHP Billiton carries out businesses in different
mining areas such as Iron ore, Petroleum, Base metals, Coal, Aluminium, Manganese and
Nickels. Minerals are generally used as intermediate goods to produce a final product.
Availability of substitutes is one important factor determining price elasticity of demand. More is
the number of substitutes, lower is the price elasticity of demand. For most of the minerals there
is no perfect substitutes. Therefore, the price elasticity of demand for minerals tend to low.
Demand is mostly inelastic in this case. One estimate found price elasticity of demand for iron
ore in the world market as – 0.24. This implies for 1 percent hike in iron ore lowers demand by
0.24 percent. Another factor responsible for making minerals demand inelastic is the relatively
small number of suppliers (Shettima et al. 2016). There are not many firms that sell minerals.
The market structure of mining is generally oligopoly in nature with few firms dominating the
market. As there is not much option for buyers to buy minerals from, they continue to purchase it
as a high price. This explains the reason for inelastic demand for minerals.
Recent event that affecting mining industry of Australia
In expansion of Australia’s mining industry, export demand from China plays an
important role. The rapid growth of China’s economy since 1970’s significantly contributed to
boost minerals demand in Australia. China is one of the leading consumer of Iron ore in the
world. Following China’s expansion. BHP Billiton experienced 100% expansion it its iron ore
segment in the last 14 years. The economy of China however began to slow down in recent years