Western Australia economy - Essay Example

?Western Australia Economy Table of Contents Overview of Western Australian Economy 3 Effect of Increase in Demand for Iron-Ore in Western AustralianEconomy 4 Effect of Wage Rate Changes in Labor Supply in Australian’s Mining and Other Industries 8 Effect on Labor Supply along with Importance of Labors’ Preferences 9 References 12 Overview of Western Australian Economy The economy of Western Australia is rich in resources. The development of economy of this State has been highly influenced by resources boom since 1890s. During the past few years, the industry of Western Australia’s resources had enjoyed excellent conditions instigated by its prevailing commodities’ demand in the international market1. The objective of this paper is to evaluate the probable effect of the commodity market boom in the Western Australian economy’s sector of the iron ore. The iron ore production in the Western Australian economy explicates 97% of total production in Australia. Most of the iron ore produced in Australia is predominantly exported to Asian market. Following the speedy growth during the last ten years in mainland China, Australian iron ore’s export market has significantly developed in China. This information is evident from the export amount in the year 2010 that amounted to 70 percent of the total iron ore in Australia. The following diagram represents the export figures of iron ore from Australia to the Asian market as compared to the rest of the world2. Source: 2. Effect of Increase in Demand for Iron-Ore in Western Australian Economy The production factor of iron ore in the Western Australian economy is primarily dependent on the demand prevailing in the Chinese market for iron ore. Development in the Chinese construction and industry sector is the major cause of increased demand of iron ore in China. As a result of the demand prevailing in China for iron ore with the expectations of even higher demand in the near future, the prices in the Australian iron ore will attain all time high this year, i.e., in 2011. According to the market expectations in Australia, the spot market price on an average for iron ore in the year 2011 would increase to US$153-US$154 from US$146 in the year 2010. The expected price increase for iron ore is generated by the steel output in higher amount due to increasing demand in the growing economy of China3. Source:4 The above figure illustrates the production of crude steel on a monthly basis in different countries. The illustration reveals that the steel production in China has been the highest compared to other countries of the world. From meeting up the demand for iron ore from the Asian market, especially China, Australian manufacturers are producing iron ore by utilizing their maximum capacity for exports. In this scenario, production of the optimum level of output for satisfying the international market’s demand is a matter of concern for the Australian manufacturers of iron ore. As the demand at present in the Asian market is expected to remain constant or even increase in the coming 15 years, the only concern for Australian market is to bank upon the amount of production5. The theory of isoquants and isocosts is applicable for this Australian scenario regarding the production of the optimum quality pertaining to the prevailing demand in the Asian market. A clearer prospect of the theories can be evolved after explanation of the input requirements in the commodity production with reference to the input demand and prices. The most important inputs for production of iron-ore in Australia are capital and labor. As the concern for the Australian market is to produce maximum amount of iron ore through finding the optimum combination of the inputs required for production, implementation of the concept of isoquants would be most helpful for the economy. An isoquant is that curve which depicts all efficient combination of inputs such as capital and labor by considering their technological efficiency. The quantity to be produced remains constant, but the combinations of inputs depict variation. For example, for producing a certain amount of iron ore, the work which 100 workers can do can also be done efficiently with the use of 50 workers and a few machines. The isoquants determine various amalgamations of inputs that can produce the set level of output. Source:6 The above figure demonstrates the isoquants from various combinations of labor and capital for producing cases of seeds. The challenge for the Australian economy would be to produce the required amount of iron ore with the accumulation of the minimum cost. Considering the conditions of labor shortages in the mining sectors of Australia, it can be mentioned that the scenario might have an adverse impact on the production of iron ore in Australia. There is scarcity of skilled labors such as pipe-fitters, welders, construction workers and electricians who prefer to stay in the centered location of Australia for remaining close to their families. In this case, the Western Australian economy can strive for searching input substitutions. For example, substituting machines with labor can provide effective results for the production process but at the same time the manufacturers also need to consider the available capital to be invested in the capacity utilization. Hence, isoquants would provide the best combination of inputs required for producing iron ore in enough quantity to satisfy the demands prevailing in the Asian market7. Effect of Wage Rate Changes in Labor Supply in Australian’s Mining and Other Industries The theory of the isocost lines can be effectively utilized by the Western Australian economy along with the isoquants for evaluating the profit-maximizing labor output for any firm or manufacturing unit. This is because the isocost lines depicts the labor-capital combination which can be bought by the firm with the given fixed total cost amount. The figure below shows the isocost lines. Source:8 The slope of the isocost line is calculated as minus the labor price which is divided by the capital price. This represents the relative price of the inputs, i.e. labor and capital. In the above figure, the slope is derived to be -0.6. Let this be considered in the case of one of the Western Australian economies’ iron ore producing units. Then this would indicate that the mining sectors’ labor wage rate is 0.6. Thus, without any additional cost being incurred, hiring of one more labor unit for the unit would lead to hiring of 0.6 less unit of capital for producing iron ore. It is worthwhile to mention that no unit is confined to any particular isocost line and hence the total costs of the unit would depend on the amount that it is desirable to spend. The optimal selection of the inputs combination of a firm depends on the firms’ capability of choosing the isocost line which is closest to the origin and at the same time still touches the isoquant curve8. Effect on Labor Supply along with Importance of Labors’ Preferences The national minimum wage decision initiated by Fair Work Australia has a direct impact on the workers’ supply to the mining industry in Australia. Incorporating the consequences of the isocost lines on labor supply considering the hike in the minimum wage rate initiated by the Australian government, the practical implications of the labor market does not match with the depiction of the theory. The theory suggests that in a model of perfect competition, the labor demanded by the firm does not have any impact on the wage at which the labor is available. The situation in the Western Australian economy suggests that of ‘monopsony’ in which the perfect competitive model is not at par. The monopsony situation states that the firm which is keen on maximizing profits considers the wage effect due to the use of more number of labors and thus chooses to utilize less number of labor in the situation such as ‘increased minimum wage’9. However, with the geared up mining sector in Australia, the competing firms in this industry are likely to spend amounts more than AUD100 billion in cases of projects which are labor-intensive7. The above fact increases the competition for attracting iron ore workers within the country and this result in shortage of skilled workers. The mining sectors in the remote areas are most adversely affected due to preference of the workers to stay in mainland areas in the country. Development of mining firms in the mainland ignites the adverse situation in labor supply. As the workers preferably want to stay in those main areas, consequently there are skilled labor shortages in the remote mining firms. The efficiency of the factor market needs to be applied in this scenario of the Australian mining sector. The wage rate is required to be used effectively by the manufacturers of iron ore so that labors can be efficiently traded in the factor market10. The mining sector of Australia, at present, is the greatest driver of the country’s GDP growth. The outperformance in this sector is evident from its exports, business investment and profits. Along with the growth prospect in this industry, the outlays in total wages within the Australian mining sector increased by 7.4% in the quarter end of June 2010. Along with this wage outlay, the number of job provision and appointment of workers also increased to a massive amount. Thus, this practical implication of the Australian mining industry does not resemble the situation of monopsony where competing firms choose to appoint few workers in the hiked minimum wages situation. This practical implication is due to the fact that workers do not prefer to stay in remote locations for work where most of the mining firms are situated. For attracting the workers towards the remote places, iron ore manufacturers are forced to violate the theoretical phenomenon of the ‘monopsony’11. 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