Economics Essay: Price Elasticity and Mining in Australia Today

This essay examines the concept of price elasticity of demand within the context of the Australian mining industry, with a specific focus on BHP Billiton and the impact of China's economic slowdown. It explains price elasticity of demand as the proportionate change in demand of a good due to proportionate change in its own price, highlighting its importance in understanding revenue changes due to price fluctuations. The analysis points out that minerals generally have low price elasticity due to the lack of substitutes and the oligopolistic market structure. Furthermore, the essay discusses how China's shift from a manufacturing-based economy to a consumption-based one has led to a decline in steel production, adversely affecting the demand for Australian minerals and contracting the mining industry. A supply and demand diagram illustrates the resulting decline in market price and equilibrium quantity.

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

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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

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due to shift in the focus of economic growth from a manufacture based economy to a
consumption based one. There is a notable decline in China’s steel production that significantly
lowered the demand for Australian minerals (Blagrave and Vesperoni 2018). China’s economic
slump therefore has an adverse effect on mineral industry of Australia. As the mining industry
slows down, there is an adverse effect on BHP Billiton’s business. There is actually a contraction
of the industry resulted from a decline in demand. The effect of the event on market price and
market quantity is shown in the figure below.
Figure 1: Impact of economic contraction of China on Australia’s mineral industry
In figure 1, the demand and supply condition in mining is shown by the respective
demand and supply curve of D1D1 and S1S1. The economic contraction in China, significantly
lowers minerals demand in Australia. This actually shifts the supply curve inward to D2D2

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(Baumol and Blinder 2015). The resulted equilibrium point moves downward along the supply
curve to E2. Price declined to P2 while equilibrium quantity declined to Q2.

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References
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Nelson
Education.
Blagrave, P. and Vesperoni, E., 2018. The implications of China’s slowdown for international
trade. Journal of Asian Economics, 56, pp.36-47.
Cowell, F., 2018. Microeconomics: principles and analysis. Oxford University Press.
Shettima, A.U., Hussin, M.W., Ahmad, Y. and Mirza, J., 2016. Evaluation of iron ore tailings as
replacement for fine aggregate in concrete. Construction and Building Materials, 120, pp.72-79.