Australia is one of the major exporters of iron ore as one of its resources. However,...

Australia is one of the major exporters of iron ore as one of its resources. However, there are many other producers of iron ore in the world. Suppose the price of iron ore is set in an internationally competitive market.

(a) Due to a major demand shock in China, the demand for iron ore by China increased significantly. However, at the same time, some mines in Africa closed down due to production issues. Explain how would the market equilibrium price and quantity for this product change internationally?

(b) Based on the answer you provided for part (a) what would be the new market equilibrium in Australia?

(note: I hope you can give me detail information for each separate questions, Thanks.)

Solutions

Expert Solution

a) when the demand for iron ore by China increased significantly, then the demand curve for iron ore shifts to the right and the same time, which result in increase in quantity demanded and price some mines in Africa closed due to to produciton issue which cause decrease in supply of iron ore at all price levels and hence supply curve will shift to the left which result in increase in price and decrease in equilbruim quantity and net effect of these two events will be further rise in the equilbruim price of iron ore and decrease in quantity demanded.

b) The new market equilbrium will be at higher price than original equilbruim price and decreased in quantity demanded since the world price of iron ore is increased and so due to rise in price there is a decrease in quantity demanded in Australia aas well.

c) The macroeconomy of Australia as a result of this change is that there is decrease in thier exports due to higher price of iron ore internationally and thus net export will decrease.

Rahul Sunny answered 1 year ago

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